THE MARGINAL COST-EFFECTIVENESS OF MEDICAL TECHNOLOGY - A PANEL INSTRUMENTAL-VARIABLES APPROACH

We use panel instrumental variables techniques to estimate incremental mortality and cost effects of intensive procedures for treating heart attacks among the elderly. We identify incremental effects by compari ng trends in procedure use, hospital costs, and mortality between hosp itals that adopted intensive technologies to corresponding trends at n onadopting hospitals. We formalize the identification assumptions requ ired for 'difference-in-differences' estimation and present empirical evidence on their val?dity. Accounting for unobserved heterogeneity su bstantially reduces estimated mortality effects and additional costs o f intensive procedure use. Our most conservative estimate of the avera ge cost of each additional one-year AMI survivor associated with more intensive medical treatment is at least $40,000 in 1987 dollars; more plausible estimates are $70,000 or more.