1. Economic Evaluation of Health Technology: Overview Gerald F. Kominski, Ph.D. Professor, UCLA Department of Health Services

2. Medical Technology Defined n Narrowly defined, medical technology includes the equipment, devices, drugs, and techniques used in the diagnosis and treatment of diseases or conditions n Broadly defined, it includes all the inputs, including all forms of labor and capital, used in medical care delivery -e.g., physician practice patterns

3. How Does Technology Assessment Occur in Most Markets? n Firms invest in R & D to develop new products that are “better” than existing products -Technology assessment is generally done by firms prior to introducing new products into the market n Competition imposes discipline on the market, because firms can’t afford to introduce products that aren’t useful or beneficial -When competition isn’t present, or is ineffective, then this market discipline doesn’t occur

4. Why Assess Medical Technology? n Contrast the market for health care services with other product markets, such as automobiles n Car manufacturers conduct extensive R & D -but considerable market research is also conducted by independent firms after cars are introduced to market n When purchasing a car, consumers would like information on: -purchase price -cost of ownership (i.e., operating cost) -reliability -safety

5. Information Is Valuable It Is an Economic Good Where do we get information on cars? n Consumer organizations, e.g., Consumer Reports n Quality assessment firms, e.g., A.J. Powers n Automotive magazines, e.g., Motor Trend n Other owners n Advertising (i.e., manufacturers) n Retailers

6. What’s Important When We Purchase Health Care? n Effectiveness or appropriateness of the service n Quality of the provider n Likely outcome n Price of the service n If this information is valuable: -Where do we get this information? -Why isn’t it readily available?

7. The Lack of Information in Health Care is a Source of Market Failure There are four sources of market failure, which prevent markets from functioning properly: n Market power n Incomplete information n Externalities n Public goods

8. Why Do Health Care Markets Fail? n Information asymmetry (market power) -Physicians, like many professionals, possess substantially more information than their clients information on price, quality, effectiveness, and outcomes is difficult to obtaininformation on price, quality, effectiveness, and outcomes is difficult to obtain n Physician agency (market power) -Physicians may not function as perfect agents on behalf of their patients n Extensive insurance => moral hazard (externality) -Price does not equal marginal benefit

9. Why Do Health Care Markets Fail? n Uncertainty (incomplete information) -many medical services are risky, and outcomes are uncertain or probabilistic -medicine is both art and science -practice pattern variations welfare loss due to use rates that are too high in some areas, too low in otherswelfare loss due to use rates that are too high in some areas, too low in others

10. Because Markets Don’t Function Perfectly in Health Care, Other Mechanisms Have Evolved to Protect Patients (Consumers) n Professional and facility licensure n Professional liability (i.e., malpractice) n Professional ethics -“Primum non nocere” => first, do no harm n Regulation of drugs and devices -safety and efficacy n Private and public technology assessment efforts

11. Goals of Health Care Technology Assessment n To provide information about the effectiveness and value of health care technologies, usually after their introduction into the market n Audiences -health care professionals -consumers -purchasers -manufacturers, including pharmaceuticals

12. Goals of Health Care Technology Assessment n Increasingly, technology assessment is being done before introduction of a new product into the market -for example, pharmaceutical companies want to demonstrate not only the safety and efficacy but the value of new drugs before they are approved by the FDA -nevertheless, most technology assessment still occurs after a product that has been proven safe and efficacious is introduced into health care practice including surgical procedures that do not undergo FDA approvalincluding surgical procedures that do not undergo FDA approval

13. Tools of Technology Assessment n Decision analysis n Cost-effectiveness, cost-benefit, and cost-utility analysis n In principle, these are the same tools used by private companies when they are deciding how to maximize their return on investment (ROI) -the major difference is that health care technology assessment is usually done from a societal perspective, rather than the perspective of private investors