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Overview

Immediately following the 2008 global financial crisis, many economists and market observers hastened to declare that the era of free markets was now over. America, and the world as a whole, they said, were trending toward greater reliance on government controls.

The analysis focuses on the evolving requirements of economic growth as countries grow richer. “Imitative growth,” which comes from applying existing knowledge, becomes less important; “innovative growth,” which comes from new ideas, becomes more important. The world economy has entered an era of “frontier economics,” Lindsey says in the report, as growth is increasingly something that takes place at the technological frontier.

According to the paper, when countries are poor and less advanced, the economic future is relatively predictable. The example of rich countries allows policymakers in less developed countries to peek into the future and see the economic changes that need to be made. Consequently, there is less need for market competition to guide the course of development. But as countries successfully pursue “catch-up growth” and approach the technological frontier, the future grows increasingly uncertain. Now innovation, rather than imitation, is the key to continued progress, and the ceaseless trial-and-error experimentation of competitive markets becomes indispensable.

Meanwhile, the nature of the technological frontier keeps changing. Over the course of the 20th century, the central economic challenge was the fulfillment of basic material needs through mass production and mass distribution. As mass affluence spreads and deepens, though, the future course of economic development becomes increasingly unpredictable. Only wide-open competition among countless rival new ideas can solve the puzzle of increasing consumer welfare.

The richer nations get, the more they “rely on innovation to keep growth going – and, therefore, the more we need free-market policies that foster the creation of new businesses and the implementation of new ideas,” Lindsey said in the report. “If we are to rise out of the current slump and launch a new, 21st-century boom, it is in the direction of freer, more competitive markets that our policies must turn.”

Scott E. Harrington
The Wharton School
University of Pennsylvania

Alan B. Miller Professor
Department of Health Care Management
The Wharton School
University of Pennsylvania

Abstract

CER compares alternative methods of preventing, diagnosing, treating, and otherwise managing medical conditions. The Patient Protection and Affordable Care Act authorized creation and funding of an independent agency, the PatientCentered Outcomes Research Institute, to expand CER in the U.S. A key issue in the years ahead is the extent to which public investment in CER and related initiatives should be further expanded in an attempt to improve the efficiency of healthcare spending, limit cost growth, and reduce projected deficits for Medicare and Medicaid.

Introduction and Summary

Comparative effective research (CER) compares alternative methods of preventing, diagnosing, treating, and otherwise managing medical conditions. The basic goal is to provide rigorous evidence of the relative effectiveness of different methods. Although precise estimates are not available, current spending on CER represents a very small fraction of U.S. healthcare spending. For example, total CER spending was estimated at less than $1.5 billion in 2005, compared with total healthcare spending in 2009 of roughly $2.4 trillion, representing 17 percent of GDP and about $8,000 per person. Many policymakers and experts argue that substantial expansions in CER would have the potential to reduce significantly the growth rate in U.S. healthcare spending – while improving the overall quality of care.

The American Recovery and Reinvestment Act (ARRA) of 2009 authorized federal expenditures of $1.1 billion to fund CER. The Patient Protection and Affordable Care Act of 2010 subsequently authorized creation and funding of an independent agency, the Patient-Centered Outcomes Research Institute, to fund and otherwise support CER. The prevalent theoretical justification for public funding is that CER findings constitute a public good for which private incentives for production are less than socially optimal. The ensuing lack of evidence concerning the merits of alternative medical treatments in turn results in suboptimal medical care and excessive spending on treatments that are not based on scientific evidence.

Substantial interest in increased public investment in CER reflects general concern with developing appropriate policies to address high and rapidly growing U.S. healthcare spending and the enormous long-term fiscal burdens projected for Medicare and Medicaid. According to the Institute of Medicine (IOM), less than half of medical care provided in the U.S. is based on evidence of what works. A lack of evidence on effective care and research on regional variation in Medicare spending have provided significant impetus to proposals for increased government spending on CER in general and for the CER provisions in the ARRA and PPACA in particular. Research on regional variation documents substantial variation in Medicare spending across regions, due primarily to differences in the amounts of medical care provided for similar conditions. While not unequivocal, other research suggests that much higher spending in some regions is not associated with higher quality medical outcomes and that higher spending in some cases might be associated with worse health outcomes. These findings have led some researchers, observers, and policymakers, including President Obama and former Director of the Office of Management and Budget, Peter Orzag, to posit that higher Medicare spending could be reduced by up to 30 percent annually without reducing quality of care and to propose increased spending on CER as a means to achieve those savings. More generally, by providing more and better evidence of what works 2 best, it is hoped that CER will encourage patients and providers to curtail costly yet ineffective treatments while improving health outcomes.

As is true for all proposals that affect U.S. healthcare spending, increased public spending on CER has generated controversy and resistance. Concern has been expressed about the “public good” rationale for increased government spending; the likely timeliness and impact of CER; the possibility of unintended, adverse health effects; the potential effects of rent-seeking and political pressure on the types of CER that are publicly funded; possible crowding out of private CER; and the potential evolution of public spending on CER toward regimes where government-sponsored CER is used to make coverage decisions under Medicare and/or private insurance. There is also concern that government-funded CER will gravitate toward “cost-effectiveness” analysis, which considers the relative effectiveness of different forms of medical care in relation to the costs of providing care, and again be used to decide what forms of care are reimbursed by government and private insurance.

Given this context, a key issue confronting citizens and policymakers in the U.S. in the years ahead is the extent to which public investment in CER and related initiatives should be expanded in an attempt to improve efficiency of healthcare spending, limit cost growth, reduce projected spending on Medicare and Medicaid. This study addresses this issue by providing an overview and critical analysis of public funding of CER and alternative methods of promoting CER. The study emphasizes the desirability and feasibility of incentivizing increased private investment in CER, as either an alternative or complement to public spending. It explores key impediments to higher private investment in CER, the rationales for increased public investment, the potential benefits and inherent limitations of publicly-funded CER, and the advantages of a multifaceted approach to incentivizing increased private investment.

The study makes three principal arguments. First, given the complexity and dynamism of modern healthcare and the inherent limitations of public investment in CER, it is desirable to encourage substantial and diverse private sector investment in CER. Second, although the public good characteristics of investment in information reduce private incentives for investment in CER, a more important impediment is the reduction in demand for CER attributable to the design of government and private health insurance and associated provider reimbursement. Third, even apart from the disincentives for CER from the insurance system, careful attention should be paid to possible policies for subsidizing CER without direct government funding and allocation of CER funds. In particular, consideration should be given to promoting the open availability of research data on medical treatments and health outcomes and to expanding tax incentives to promote decentralized, non-governmental investment in CER. The overall conclusion is that well-designed policies to increase incentives for private sector CER have the 3 potential to increase substantially the evidentiary basis of medical decisions, including the stimulation of entrepreneurial investment in innovation to guide such decisions.

The analysis begins with detailed background on the objectives, nature, and methods of CER, how CER differs from cost-effectiveness analysis, and factors influence whether increased spending on CER will reduce healthcare spending. The next section examines public and private CER in the U.S., including provisions in the PPACA, followed by discussion of public systems of promoting CER and related analyses in selected countries. Given this background, the study then examines in greater detail the rationales for and limitations of increased public spending on CER. The final section considers broad strategies for incentivizing private investment in CER as an alternative or complement to public investment.