Treatment Uncertainty and Irreversibility in Medical Care: Implications for Cost-Effectiveness Analysis

Graff Zivin J, M Neidell, and L Feldman, “Treatment Uncertainty and Irreversibility in Medical Care: Implications for Cost-Effectiveness Analysis,” in The Economics of New Health Technologies - Incentives, Organization and Financing, J Costa-Font, C Courbage, and A McGuire (Eds.), Oxford University Press, June 2009.

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In determining the value of any new medical technology, it is essential to weigh the treatment’s immediate benefits against any potential impact on the set of future treatment options. The influence of current medical technology on the effectiveness of future potential interventions is often overlooked in adoption and coverage decisions. There are often large degrees of uncertainty about both the current costs and benefits of technology adoption, and/or coverage. Moreover, some health interventions, once exercised, restrict future potential interventions for both related and unrelated medical conditions. Since actions taken today may involve some irreversible transformation of the set of available interventions in the future, this phenomenon has become known as the irreversibility problem. The benefit associated with actions that preserve treatment choices in the future, above and beyond the direct value associated with those actions, is referred to as the option value of the intervention. This chapter develops a basic framework to incorporate option values in medical technology evaluations.