Less expensive, lower-quality innovations abound in every economic sector—except medicine
The Cost-effectiveness Plane
To help maximize the overall benefits in health care under a utilitarian framework and conditions of constrained resources, health economists use an analytic tool called cost-effectiveness analysis (CEA) that quantifies the added expenditure necessary to obtain a unit of health benefit (typically measured in quality-adjusted life years or QALYs, pronounced “kwallies”). The most common application of CEA is to examine the value of medical innovations compared to the standard of care routinely available, since new technologies are an important cause of the increase in health-care costs.
If the “unit cost” for a QALY of benefit (that is, the cost-effectiveness ratio) is less than some threshold (conventionally $50,000 or $100,000 per QALY), then adoption of the innovation is deemed “incrementally cost-effective,” since the benefit obtained compares favorably to that obtainable at similar cost using accepted medical technologies (such as dialysis, which has a cost-effectiveness ratio variously estimated at between $50,000 and $80,000 per QALY). Above the ratio, they are deemed not to be cost-effective. That is, the (relatively small) incremental benefits of the intervention do not justify the (relatively large) incremental costs.
Comparisons between alternative approaches in cost-effectiveness analyses can usefully be depicted on a cost-effectiveness plane, shown in the figure opposite. Most studied medical innovations fall into the northeast quadrant of this plane; that is, they increase both costs and health benefits. Within this quadrant, the acceptability threshold would be represented by a line of constant slope, indicating the “willingness to pay” (WTP) for a QALY, separating nominally cost-effective therapies from cost-ineffective therapies.
Of course, if all innovation in health care fell into this northeast quadrant, innovation could only increase the costs of care. That is, even so-called cost- effective health-care innovations would always cost more money than the alternatives they replaced. This is often a point of confusion, sometimes purposeful, as when our political leaders claim that “preventative medicine” is highly cost-effective and would therefore save money. In fact, while most recommended preventative services are cost-effective (meaning the value of their benefits in terms of QALYs gained justifies the costs in terms of dollars spent), only very rarely are preventative services actually cost-saving, even when all the “downstream” avoided medical expenses are folded into the analysis. Indeed, new “cost-effective” innovations are one of the principal reasons that health-care costs continue to soar.
In fact, only innovations that fall south of the equator in the cost- effectiveness plane are actually cost-saving. When those innovations are also superior to the alternative, or standard of care, they are considered “dominant” (that is, cost decreasing and quality improving); adoption of these southeast quadrant innovations should not be controversial. However, as health-care costs continue to rise, cost-saving innovations may be increasingly attractive even when they do not improve care, particularly in a weak economy. While some innovations in the southwest quadrant would clearly be unattractive because they are substantially worse than the available standard of care or offer only trivial cost savings, what about innovations that offer substantial cost saving and are genuinely almost as good as the standard? In a 2004 article in Medical Decision Making, fellow researchers and I described innovation that is greatly cost saving but only slightly quality reducing as “decrementally” cost- effective. In such cases, the savings could potentially increase the overall good despite the sacrificed benefit. Indeed, if “much cheaper, almost as good” products are attractive in other economic sectors because they permit the reallocation of saved resources to items of more value than the benefits sacrificed, why not in medical care as well?