Medicare, Cost-Effectiveness Analysis and New Medical Technology

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Medicare, the federal health insurance program that covers some forty million elderly and disabled Americans, has grown rapidly since its inception in 1965. Medicare spending increased from $33.9 billion in 1980 (1.3% of GDP) to $252 billion in 2002 (2.5%). Spending growth has been driven in part by inflation and the aging of the Medicare population (older beneficiaries spend more than younger ones) but mostly by the incorporation of new and sometimes expensive medical technologies. For the purposes of this paper, technology is defined broadly to include drugs, devices, medical and surgical procedures, and the organizational and supportive systems within which such care is provided. While some new technologies may reduce costs by replacing more expensive alternatives or preventing expensive health consequences, the overall effect of new technology is an increase in costs. Thus, how Medicare decides to pay for new medical technology has profound im-plications for beneficiary access to health-enhancing medical advances, as well as for the fiscal well-being of the program. Over the years, Medicare has been criticized on grounds that its procedure for covering medical advances is ill-defined, unpredictable and opaque. In response, policy makers have recently attempted to make the process more transparent, consistent and evidence-based. Notably, they have also tried, without success, to incorporate cost-effectiveness analysis as an explicit criterion for coverage in an effort to obtain a better value for the dollars spent on health care. This paper describes Medicare’s ongoing efforts to pay for efficient and cost-effective medical technology, the barriers the program faces in this endeavor and prospects for the future.

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