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The rapid and continuing growth of expenditures is a central issue in many policy decisions concerning the medical care system of the United States. Policymakers, health professionals, and consumers are seeking ways to control this growth while simultaneously improving the quality of health care. Increasingly, the use of cost-effectiveness analysis/cost-benefit analysis (CEA/CBA) is being advocated as a possible means of making the medical care system more efficient. In particular, this technique is suggested for use in health care programs--for example, by the medicare program in its reimbursement coverage decisions. Nevertheless, a great deal of confusion and disagreement surrounds the implications and feasibility of applying CEA/CBA in health care. To aid in their decisions concerning the possible use of CEA/ CBA in Federal health programs, the Senate Committees on Labor and Human Resources and on Finance asked OTA to explore the applicability of CEA/CBA to medical technology.

In the assessment, three major issues are examined: 1) the general value of CEA/CBA in decisionmaking about the use of medical technology; 2) the methodological strengths and shortcomings of the technique; and 3) the potential for initiating or expanding the use of CEA/ CBA in six health care programs-reimbursement coverage, the Professional Standards Review Organizations (PSROs), health planning, market approval for drugs and medical devices,

EVALUATING COSTS AND BENEFITS

All decisions have consequences. Usually, however, in most decisionmaking processes only a fraction of all potential consequences is taken into account. The inherent complexities and uncertainties associated with many decisions make it extremely difficult to identify and weigh all possible consequences. In general, however, the quality or validity of decisions can

R&D activities, and health maintenance organizations (HMOs)—and, most importantly, the implications of any expanded use.

The prime focus of the assessment is on the application of CEA/CBA to medical technology, i.e., the drugs, devices, medical and surgical procedures used in medical care, and the organizational and support systems within which such care is provided. Except in a background paper on psychotherapy, the report does not address psychosocial medicine. Other factors influencing health, such as the environment, are not directly covered either. The findings of this assessment, though, might very well apply to health care resource decisionmaking in general, and with modification, to other policy areas such as education, the environment, and occupational safety and health.

This OTA assessment finds that CEA/CBA cannot serve as the sole or primary determinant of a health care decision. Decisionmaking could be improved, however, by the process of identifying and considering all the relevant costs and benefits of a decision. At present, using the approach or process of CEA/CBA in decisionmaking may be more helpful than the rigid and formal application of CEA/CBA study results in health care program decisions. It is unrealistic, moreover, to expect that CEA/CBA, in itself, would be an effective tool for reducing or controlling overall expenditures for medical care.

be increased by analysis that forces a structuring of the decision process-that provides a consistent framework for identifying and considering as many of the relevant costs and benefits as is feasible.

The public, or governmental, sector is called upon to make certain decisions that are imprac

tical for the private sector to make. Examples of these are decisions concerning national defense or air pollution control, neither of which is amenable to being traded in the marketplace. Other decisions are made by the public sector for social reasons such as assuring equitable distribution of what may be considered essential goods (e.g., health care for the elderly). Because conventional private sector techniques, such as capital budgeting and return-on-investment analysis, are insufficient for these decisions, techniques such as CBA and CEA have been developed. In the medical care area, CEA/CBA is designed to integrate the economic aspects of a decision with the health aspects of that decision. Consequently, it should not be considered simply an economic tool.

There are two basic types of health care resource allocation decisions which in theory could benefit from a CEA/CBA process. The first are decisions made within a fixed or prospectively set budget, such as those made by HMOs. The second are decisions made in the

absence of a direct budget constraint, such as those made for medicare reimbursement or in health planning.

In the former-allocation decisions made within a budget-tradeoffs must be made, since not all projects can be funded. The projects that promise to deliver more benefits for the cost should be more attractive than those projects expected to deliver fewer benefits. In these decisions, the function of CEA/CBA would be to illuminate the decision process and to require that implicit judgments be made more explicitly, thus forcing external examination of the assumptions and values placed on decision variables.

In nonconstrained decisions, direct tradeoffs between competing projects often are unnecessary. Consequently, a function of CEA/CBA in these decisions would be to force consideration of economic factors. In health planning decisions, for example, planners would be asked to consider not only whether a service is needed but also whether it is worth the cost.

The terms CBA and CEA refer to formal analytical techniques for comparing the positive and negative consequences of alternative ways to allocate resources. In practice, the comparison of costs and benefits is accomplished through various analytical approaches, which comprise a spectrum ranging from sophisticated computer-based analysis using large amounts of epidemiological and other data to partially intuitive, best-guess estimates of costs and benefits. Some analyses may take into account the results of clinical trials of a technology and model the technology's effect on health outcomes. Others may assume that the alternative technologies under study have equal effectiveness and concentrate on the difference in costs involved.

Thus, there is a continuum of analyses that examine costs and benefits. At one end of the continuum are what will be referred to as "net cost" studies. In these studies the emphasis is on

costs, and net cost studies in the past have often assumed benefits or efficacy to be equal. At the other end of the continuum are analyses that attempt to relate the use of the technologies under study to specific health-related outcomes and to compare the costs of the technologies to the differences in health benefits. CBA and CEA comprise the entire set of analytical techniquesdifferentiated by the specifics of what costs and benefits are considered and how they are analyzed-on this continuum.

The principal distinctions between CEA and CBA lie in the valuation of the desirable consequences of a decision, in the implications of the different methods of that valuation, and usually in the scope of the analysis. In CBA all costs and all benefits are valued in monetary terms. Thus, conceptually, CBA can be used to evaluate the "worth" of a project and would allow comparison of projects of different types (such as dams and hospitals). In CEA, the health-related ef