Treatment uncertainty and irreversibility in medical care: implications for cost-effectiveness analysis *

Joshua Graff Zivin, Matthew Neidell and Lauri Feldman

in The Economics of New Health Technologies

Published in print May 2009 | ISBN: 9780199550685
Published online February 2010 | e-ISBN: 9780191720543 | DOI:
 Treatment uncertainty and irreversibility in medical care: implications for cost-effectiveness analysis *

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This chapter discusses the introduction of uncertainty and irreversibility in cost-effectiveness analysis to determine optimal funding and resource allocation for medical technologies, research, and treatment. It is essential to use a valuation model that considers the uncertain arrivals of future diseases and the varying degrees of effectiveness with which they can be treated. Irreversibility raises the value of the option-preserving treatment. The existence of an option value — that value above and beyond the direct value of treatment for the current condition — means that a treatment that is inferior to an alternative for its indicated use may be the superior choice when lifetime welfare is considered. Optimal decision-making requires a careful comparison of the ‘costs’ of a less effective treatment for a condition today with the ‘benefits’ of more effective treatments for conditions in the future. The size of the option value and thus the degree to which valuations that ignore it are miscalculated, depends critically on the relative effectiveness of treatments, the likelihood of diseases arriving in the future, the extent to which current interventions limit the ability to treat these future conditions, and the relevant discount rate.

Keywords: medical technology; medical innovation; irreversibility; uncertainty; option-preserving treatment; optimal decision-making

Chapter.  4376 words.  Illustrated.

Subjects: Public Health and Epidemiology

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