The Economics of Medical Technology: Volume 23

Medical technology broadly defined to include all aspects of the process of treating disease (e.g., pharmaceuticals, medical devices, and surgical procedures) is profoundly important for individual health and, consequently, also for general welfare. Advances in medical technology hold out the prospect of both improved population health and increased general welfare. However, because of the nature and extensive regulation of the markets for health care goods and services, the development and application of medical technologies differs fundamentally from nonmedical technological advances. In this volume of the series of Advances in Health Economics and Health Services Research, entitled The Economics of Medical Technology, we present several papers that provide theoretical and empirical evidence about the market for medical technology.

Purpose – The cost of new drug development is increasing every year. Pharmaceutical companies use R&D joint ventures, mergers, and outsource different stages of pharmaceutical R&D activities for a faster and cost minimizing method of innovation. Pharmaceutical companies outsource R&D activities to independent small biotech or pharmaceutical companies that specialize in different stages of pharmaceutical R&D. This chapter examines the determinants of the payment structure of research contracts between large bio/pharmaceutical companies and specialized research firms.

Methods – Determinants of R&D contracts are analyzed using detailed R&D contract data between bio/pharmaceutical companies and independent research firms for 10 years. A multinomial logit model is used in order to understand the determinants of three different types of contracts; royalty contracts, fixed payment contracts, and the mixed contracts.

Findings – Under uncertainty, the likelihood of a royalty contract rises for the early stages of the research and with the patent stock of the research firm. It is more likely to observe both royalty and fixed payment if the pharmaceutical client has past contracts with the same research firm. The results also suggest that if Food and Drug Administration (FDA) is more stringent in any disease area in reviewing the new drug application, then the likelihood of signing pure royalty contract decreases.

Implications – Understanding the nature of R&D contracts and the effects of FDA's behavior on the pharmaceutical R&D contract is important because these contracts not only affect the cost of new drug invention but also the quality and the rate of invention.

Value – Results are useful for both the pharmaceutical companies and the economic/business researchers.

Purpose – This study examines the effect of price regulation and competition on launch timing and pricing of new drugs.

Methods – Our data cover launch experience in 15 countries from 1992 to 2003 for drugs in 12 major therapeutic classes. We estimate a two-equation model of launch hazard and launch price of new drugs.

Findings – We find that launch timing and prices of new drugs are related to a country's average prices of established products in a class. Thus to the extent that price regulation reduces price levels, such regulation directly contributes to launch delay in the regulating country. Regulation by external referencing, whereby high-price countries reference low-price countries, also has indirect or spillover effects, contributing to launch delay and higher launch prices in low-price referenced countries.

Implications – Referencing policies adopted in high-price countries indirectly impose welfare loss on low-price countries. These findings have implications for US proposals to constrain pharmaceutical prices through external referencing and drug importation.

Purpose – To examine the effect of pharmaceutical innovation on the functional status of nursing home residents.

Methodology/approach – Estimation of econometric models of the ability of nursing home residents to perform activities of daily living (ADLs) using cross-sectional, patient-level data from the 2004 National Nursing Home Survey. The explanatory variables of primary interest are the characteristics (e.g., the mean vintage (FDA approval year)) of the medications used by the resident. We control for age, sex, race, marital status, veteran status, where the resident lived prior to admission, primary diagnosis at the time of admission, up to 16 diagnoses at the time of the interview, sources of payment, and facility fixed effects.

Findings – The ability of nursing home residents to perform ADLs is positively related to the number of “new” (post-1990) medications they consume, but unrelated to the number of old medications they consume. I estimate that if 2004 nursing home residents had used only old medications, the fraction of residents with all five ADL dependencies (number of activities for which the resident is not independent) would have been 58% instead of 50%.

Social implications – During 1990–2004, pharmaceutical innovation reduced the functional limitations of nursing home residents by between 1.2% and 2.1% per year.

Originality/value of chapter – The first public-use survey of nursing homes that contains detailed information about medication use, and better data on functional status than previous surveys, is used to help explain why there has been a significant decline in the functional limitations of older people.

Purpose – Policymakers hope that comparative effectiveness research will identify examples of widely used therapies that are no better than less expensive alternatives and, consequently, reduce health care spending. Comparative effectiveness research is unlikely to reduce spending if physicians are quick to adopt effective treatments but slow to abandon ineffective ones.

Methodology/approach – We present a theoretical model that shows how physicians will adopt new treatments in response to positive evidence more readily than they abandon existing treatments in response to negative evidence if the marginal costs of production decline post-adoption. We report trends in the use of two common procedures, percutaneous coronary intervention (PCI) for patients with stable angina and routine episiotomy in vaginal childbirth, where comparative effectiveness research studies have failed to find evidence of a benefit.

Findings – Use of PCI and episiotomy have declined over time but are still excessive based on the standards implied by comparative effectiveness research.

Practical implications (if applicable) – The findings suggest that comparative effectiveness research has the potential to reduce costs but additional efforts are necessary to fully realize savings from abandonment.

Originality/value of chapter – There is a large literature on technological adoption in health care, but few studies address technological abandonment. Understanding abandonment is important for efforts to decrease health care costs by reducing use of ineffective but costly treatments.

Purpose – Objective measures of a new treatment's expected ability to improve patients’ health are presumed to be significant factors influencing physicians’ treatment decisions. Physicians’ behavior may also be influenced by their patients’ disease severity and insurance reimbursement policies, firm promotional activities and public media reports. This chapter examines how objective evidence of the incremental effectiveness of novel drugs to treat cancer (“chemotherapies”) impacts the rate at which physicians’ adopt these treatments into practice, holding constant other factors.

Design/methodology – The novelty of the analysis resides in the dataset and estimation strategy employed. Data is derived from a United States population-based chemotherapy order entry system, IntrinsiQ Intellidose. Quality/price endogeneity is overcome by employing sample selection methods and an estimation strategy that exploits quality variation at the molecule-indication level. Pooled diffusion rates across molecule-indication pairs are estimated using nonparametric hazard models.

Findings – Results suggest incremental effectiveness is negatively and nonsignificantly associated with the diffusion of new chemotherapies; faster rates of diffusion are positively and significantly related to low five-year survival probabilities and measures of perceived clinical significance. Results are robust to numerous specification checks, including a measure of alternative therapeutic availability. We discuss the magnitude and potential direction of bias introduced by several threats to internal validity. Evidence of incremental effectiveness does not appear to motivate the rate of specialty physician diffusion of new medical treatment; in all models high risk of disease mortality and perceptions of therapeutic quality are significant drivers of physician use of novel chemotherapies.

Value/originality – Understanding the rate of technological advance across different clinical settings, as well as the product-, provider-, and patient-level determinants of this rate, is an important subject for future research.

Purpose – The aim of this paper is to examine the diffusion of a new surgical procedure with lower per-case cost and how its diffusion path is affected by the simultaneous introduction of a new drug class that may be an effective treatment to prevent surgery. In particular, we examine whether a process of technology substitution exists that influences the diffusion process of the surgical technology. Given their different cost implications, the interaction of these two different technologies, surgery and drug intervention, is relevant from the perspective of health expenditure. This is of particular interest in health care as technology adoption and diffusion has been cited as a major driver of expenditure growth. Such expenditure growth has been increasingly targeted through the use of market-orientated policy tools aimed at increasing efficiency. Our research is thus addressing the question of how economic incentives influence the diffusion process and we discuss the impact of a set of incentives on hospital behavior.

Design/methodology – Hospital admission data for the financial years 1998/1999 to 2007/2008 in England are used to empirically test the contribution of prescription uptake and market-oriented reforms. Dynamic panel data models are used to capture any changes in technology preference during the period of study.

Findings – Our results suggest that the hospital sector exhibits a strong new technology preference, tempered by the interaction of competition for patients and the ability of the primary care sector to substitute treatments.

Value/originality – Given the current fast technological change, we examine the technological race occurring in the health care sector. We account simultaneously for the diffusion of different technologies not only within the same typology but also with technologies of a different class.

Purpose – This chapter discusses the relationship between health insurance and hospitals’ decisions to adopt medical technologies. I focus on both how the extent of insurance coverage can increase incentives to adopt new treatments, and how the parameters of the insurance contract can impact the types of treatments adopted.

Methodology/approach – I provide a review of the previous theoretical and empirical literature and highlight evidence on this relationship from previous expansions of Medicaid eligibility to low-income pregnant women.

Findings – While health insurance has important effects on individual-level choices of health care consumption, increases in the fraction of the population covered by insurance has also been found to have broader supply side effects as hospitals respond to changes in demand by changing the type of care offered. Furthermore, hospitals respond to the design of insurance contracts and adopt more or less cost-effective technologies depending on the incentive system.

Research limitations/implications – Understanding how insurance changes supply side incentives is important as we consider future changes in the insurance landscape.

Originality/value of paper – With these previous findings in mind, I conclude with a discussion of how the Affordable Care Act may alter hospital technology adoption incentives by both expanding coverage and changing payment schemes.