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Page 211 Estimating Economic Benefits from ATP Funding of New Medical Technologies 1 Tayler H. Bingham Research Triangle Institute (RTI) Center for Regulatory Economics and Policy Research OVERVIEW An Evaluation Framework This study develops a project evaluation framework based on economic principles and uses it to conduct a set of case studies of seven tissue-engineering projects funded by the ATP between 1990 and 1996. Tissue engineering offers the potential of better medical treatments at lower cost. Included in the study are new technologies for the diagnosis and treatment of cancer; the treatment of diabetes, damaged ligaments, tendons, and articular cartilage; and transplanting xenogenic organs. Estimating Technology Benefits The economic benefits of new medical technologies include any reductions in the direct costs of medical treatment, and, reductions in morbidity, mortality, and patient pain and suffering. The method incorporates a counterfactual scenario with “defender technologies”—to model the situation without ATP funding—for 1 This paper summarizes a substantial study of seven ATP-funded tissue-engineering projects published as A Framework for Estimating the National Economic Benefits of ATP Funding of Medical Technologies, NIST GCR 97-737, led by Dr. Sheila A. Martin. This report is available on the ATP website at http://www.atp.nist.gov/eao/eao pubs.htm . Dr. Martin has since left RTI and is now an executive policy advisor to the governor of the state of Washington. Appreciation is extended to Rosalie Ruegg for her counsel and support.
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Page 212comparison with the situation with ATP funding. Three measures of benefit are computed for each project: (1) social return on investment, (2) private return on investment, a component of social return, and (3) social return on public investment, the return on ATP's investment based on the difference in social return with and without the ATP. Findings: Large Social Spillovers All the projects have expected social returns much larger than their private returns, primarily due to projected positive spillovers to patients treated with the new technologies. ATP played a significant role in increasing the expected returns on these projects to the developers and to society at large by accelerating the R&D phase of the projects and improving the probability of technical success. The estimated composite social return on ATP's investment in the seven projects is $34 billion, in net present value. Limitations Our methodology and its use to evaluate the seven projects have limitations. Modeling the entire process from R&D to health outcomes requires the development and use of a large amount of data. In some cases, the data is directly estimated. In others when data are lacking, assumptions must be employed. Thus, the findings are preliminary. Despite limitations, this approach does provide a useful framework for evaluating ATP's expected contributions to social welfare. EVALUATING MEDICAL TECHNOLOGIES The objective is to provide insight regarding the factors that affect the social return on public investment in ATP-funded projects with medical applications. ATP-funded medical technologies may improve the long-run health outcomes of thousands of patients each year with acute and chronic diseases. They may also reduce the cost of health care. Valuing these effects requires extending conventional benefit-cost models and applying methods commonly used in health economics. We developed a framework for measuring benefits resulting from improved patient health, reduced cost of medical care, and creation of new business opportunities for the technical innovators and their partners. We also demonstrated the feasibility of our approach by applying the methodology to seven ATP-funded technologies in tissue engineering. Tissue engineering integrates discoveries from biochemistry, cellular and molecular biology, genetics, material science, and biomedical engineering to produce materials and techniques that can be used either to replace or to correct poorly functioning components in humans or animals. At the time of the study, the seven projects examined comprised all of the tissue engineering projects funded by the ATP;
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Page 213hence, it provided comprehensive coverage of projects funded in the technology area. 2 This paper describes RTI's general approach to assessing the impact of ATP funding on medical technologies. It also briefly describes the seven tissue-engineering projects funded by the ATP, and outlines RTI's procedures for conducting case studies of the seven projects. It reports the results of the analysis, with an emphasis on the social benefit attributed to ATP funding. THE ATP-FUNDED TECHNOLOGIES Table 1 lists the seven projects. The first four projects received more of the effort and resources because better information about potential impacts of the technology and the costs of development was available for them. Aastrom Biosciences sought to develop a laboratory-scale prototype bioreactor that can culture and grow large numbers of human stem cells from a few. This technology would greatly reduce the invasiveness, inconvenience, costs, pain, and risks of bone marrow transplant (the focus of our evaluation), and it has other potential applications as well. Integra LifeSciences' project sought to develop a novel synthetic polymer for creating new bioabsorbable materials, free of toxins, for use in biomedical implants. The technology has broad applications in orthopedics (fracture fixation, cartilage and ligament repair), wound care, cardiovascular repair, and drug delivery. Use of biomedical implants made from the material is expected to minimize or eliminate the need for second surgeries to remove implants, eliminating the costs and risks of such surgeries and possibly reducing the likelihood of secondary fractures. Our evaluation focused on the first expected application, nonweight-bearing pins and screws for fracture fixation. BioHybrid Technologies' project was to develop the capability to implant encapsulated cells from pig embryos into the human body to produce hormones or other bioactive agents that the patient cannot produce at all or not in sufficient quantities. The approach is to encase the cells in microspheres with pores large enough to permit glucose, nutrients, electrolytes, oxygen, and relatively small bioactive species, like insulin, to pass through, but small enough to block the larger immunocytes and other relatively large molecules involved in transplant rejection. The “microreactor” technology has the potential for therapeutic applications to diabetic patients (the focus of our evaluation), as well as to those with Parkinson's disease, Alzheimer's, and other diseases. If successful, the technology would substitute for a functioning pancreas and would virtually eliminate many of the risks of long-term complications resulting from diabetes. 2 Subsequently, ATP organized a Focused Program in Tissue Engineering and a number of additional tissue-engineering projects were funded. A description of the Focused Program and a listing of all tissue engineering projects funded through the present time can be found at the ATP website: http://www.atp.gov .
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Page 214 TABLE 1 Projects Included in This Study ATP Award ATP Project Title Project Sponsor Competition No. Duration Funding Level In-Depth Case Studies Human Stem Cell and Hematopoietic Expansion Systems “Stem Cell Expansion” Aastrom Biosciences, Inc. 91-01 2 years $1,220,000 Structurally New Biopolymers Derived from Alpha-L Amino Acids “Biopolymers for Tissue Repair” Integra LifeSciences Corporation 93-01 3 years $1,999,000 Disease Treatment Using Living Implantable Microreactors “Living Implantable Microreactors” BioHybrid Technologies Inc. (lead company in joint venture) 93-01 3 years $4,263,000 Treatment of Diabetes by Proliferated Human Islets in Photocrosslinkable Alginate Capsules “Proliferated Human Islets” VivoRx, Inc. 94-01 3 years $2,000,000 Brief Case Studies Fabrication Using Clinical Prosthesis from Biomaterials “Biomaterials for Clinical Prostheses” Tissue Engineering, Inc. 92-01 3 years $1,999,000 Application of Gene Therapy to Treatment of Cardiovascular Diseases “Gene Therapy Applications” Progenitor, Inc. 94-01 3 years $1,996,000 Universal Donor Organs for Transplantations “Universal Donor Organs” Alexion Pharmaceuticals 95-01 3 years $1,999,000
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Page 215 VivoRx's project was similar to BioHybrid's in terms of objective, but differed in terms of approach. 3 VivoRx's focus was on developing culture conditions and methods for proliferating human islet cells for encapsulating in an immunoprotective membrane for transplantation into diabetes patients (the focus of our evaluation). It also has potential therapeutic applications for liver disease, thyroid disease, Parkinson's disease, and Alzheimer's disease. Tissue Engineering, Inc.'s project developed animal-derived extracellular matrix (ADMAT) material that when used to repair damaged or dysfunctional tissues and organs in the body would induce the body's own cells to rebuild the lost tissue. ADMAT, which can be spun and woven into fibers, or formed into films, foams, and sheets, provides an ordered, three-dimensional structure that can be used to support tissue regeneration. Its intended uses are to develop scaffolds for vascular grafts, ligaments, tendons, periodontal tissue, and similar reconstructions, and, ultimately, as a matrix on which “glandular” cells can grow and function. Our evaluation focus was on an early-expected use of ADMAT, for repairing the anterior cruciate ligament (ACL) in the knee. Progenitor's project was originally focused on exploiting the versatility of primitive stem cells as the basis for treating a range of ailments anchored in endothelial cells, which form blood vessels making up the circulatory system. To a lesser extent, the project was to focus on cancer treatment and bone development. In the course of its research, Progenitor discovered a molecule that plays an important role in the growth, differentiation, and proliferation of endothelial cells, expected to lead to new treatment for solid tumor cancers. The first planned application of the discovery (and the focus of this evaluation) is the diagnosis, location, and staging of soft tissue cancer metastases. The resulting improvement in diagnostic techniques will allow for more aggressive, effective cancer therapy at an earlier stage of metastasis, improving patients' prognosis. Because currently no technologies can image soft tissue adequately to diagnose metastasis at a very early stage, Progenitor's technology will not replace current technologies, but rather will add to current diagnostic techniques. Alexion Pharmaceuticals' project to develop xenogenic transplants—transplants from other animals to humans—offers an approach to solve the severe shortage of donor organs for transplantation. Hyperacute rejection generally causes xenogenic transplants to fail within minutes to hours. By developing transgenic pigs that express key human genes, Alexion would eliminate the rejection of the organs transplanted in humans. The resulting availability of suitable organs for transplant would eliminate the long waiting times with their associated negative medical effects; would allow surgeries to be scheduled optimally; would reduce or eliminate the cost of maintaining a recipient in the hospital while awaiting 3 We did not account for competitive or synergistic effects among the seven technologies in computing the composite measures.
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Page 216a donor organ; and would eliminate the need to keep donors alive on life support until the removal surgery can take place. ANALYTICAL APPROACH The methodology takes a very detailed and specific look at the entire R&D-commercialization-production-health process for each technology by linking these stages together in a techno-economic framework. The approach is to model the probability of key outcomes with and without ATP support. We begin with an analytical approach recommended by Mansfield 4 —essentially a benefit-cost framework—and modify it to handle some of the special features of medical technologies. Most notably, we use nonmarket methods to value the expected improvements in the health of individuals with acute and chronic diseases who could be benefited by the technologies. The economic burden of illness and disease potentially includes (1) direct medical costs in the form of explicit payments for prevention and treatment; (2) indirect costs in terms of productivity losses and the implicit value of the resources expended by uncompensated caregivers; and (3) intangible costs, comprising the pain and suffering incurred by patients and patient' families and friends. Our study focuses on (1) direct medical costs and (3) the intangible costs, and excludes (2) indirect effects. Creating a Counterfactual Central to evaluating ATP's contribution to the technologies and to social welfare is the need to create a “counterfactual,” that is, a hypothesized (unobserved) characterization of the world simulating how the economy and patient well-being would have been without ATP support for the technology. In developing a counterfactual, we follow a long tradition in economics of using such an approach to address public policy and technology issues. It is a practice considered fundamental to economic evaluation. We model and compare a future world without ATP support of the medical technologies to one with ATP support. To do this, we explicitly characterize the R&D, commercialization, production, and patient application phases of each technology, and also the defender technology, that is, the expected best alternative treatment that would be used if the ATP-funded technologies were not made available. The comparison nets out the effects of the alternative, displaced technologies. Rational R&D Decisions Companies are assumed to pursue R&D because, if successful, the outcome provides a stream of profits in the future. Our approach is to mimic the rational 4 E. Mansfield, Estimating Social and Private Returns from Innovations Based on the Advanced Technology Program: Problems and Opportunities, NIST GCR 99-780, January 1996.
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Page 217R&D decision-making process of entrepreneurs and see how ATP is likely to affect the process and its outcomes. ATP support increases the level of effort the company devotes to the R&D phase of technology development. When the R&D process is a search or sampling process, as it is for the technologies we evaluated, the more effort spent searching, the more likely the entrepreneur is to find a successful solution to the problem—if there is one. 5 Technical Phase The R&D phase is characterized by large technical uncertainties regarding the outcome of the effort. Since the projects' technical development phase was not completed at the time of the study, our modeling of the R&D effort for these tissue-engineering projects also evaluates ATP's expected impact on the probability of technical success as well as on the timing of any success. Commercialization Phase During the commercialization phase, a firm invests in product development research, for example, in conducting clinical trials, establishing a production facility, or gaining regulatory acceptance. This phase is characterized by marketing uncertainties regarding the venture, and only occurs if the R&D effort is at least partially successful. The commercializing firm may or may not be the innovator or the innovator's partner or collaborator. Diffusion Model The diffusion of a successful technology and its gradual displacement of the defender technology characterize the technology production phase. The Bass diffusion model 6 captures the process of diffusion. To be accepted, the new technology must offer a lower-cost or better way of doing something. Interviews with experts in the application of each technology provided information used to project the rate and ultimate market penetration of each tissue-engineering project. Using the resulting data in the Bass model gave the quantity of disease and illness treatment for the seven technologies over time for a given patient cohort. 5 See Hans P. Binswanger, “The Microeconomics of Induced Technical Change,” in Induced Innovation, Hans P. Binswanger and Vernon Ruttan, editors, Baltimore, MD: Johns Hopkins University Press, 1978. 6 See a description of the model in Frank M. Bass, “A New Product Growth Model for Consumer Durables,” Management Science, 15(5):215-227.
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Page 218 Estimating Economic Returns The economic benefits from the public and private investments in medical technologies are measured in terms of net present value (NPV), i.e., dollars adjusted for the time value of money. Benefits and costs that occur in future periods are “discounted” to make them comparable with those occurring in the present. The “discount rate”—used to adjust dollar amounts to an equivalent time basis—reflects the “opportunity cost” for funds available for either investment or consumption. A project with a NPV greater than zero, by definition, has economic values greater than prevailing alternative economic opportunities and, therefore, is worth doing. If the NPV calculation takes into account the stream of revenues and costs to the investor alone, the NPV measures the private return on investment. Our estimation of private returns to the investor/innovator companies takes into account revenue resulting from sales of the new medical technology products, less all estimated development and production costs associated with bringing the new products to market. If an investment imposes costs on, or conveys benefits to, others than the investor, and these costs and benefits are accounted for in the NPV calculation, the resulting NPV measures the social return on the investment. The social return includes not only the return to the private investor, but all effects both positive and negative that extend to others in society. The presence of large spillovers from R&D investments—particularly from investments in enabling technologies such as those promised by the ATP—significantly increase social benefits, and provide a major rationale for public funding of R&D. New medical technologies that cost no more, or even less than the best alternative treatments, and provide increased benefits to patients, generate spillovers in the form of consumer surplus or market spillovers. 7 The social return on public investment is the incremental net return to society from the technology that is attributable to the public investment. It is the difference in societal returns with, versus without, the ATP funding. 8 There are three ways ATP funding may increase social returns: (1) It can accelerate R&D, thereby leading to earlier introduction of the new technology. Receiving the benefits earlier or over more years will increase NPV. (2) It can increase the intensity of R&D, thereby increasing the probability of R&D success. (3) It can broaden the scope of R&D to include a wider range of potential applications and increased NPV. 7 For a description of market spillovers, knowledge spillovers, and network spillovers, see Adam B. Jaffe, Economic Impact Analysis of Research Spillovers: Implications for the Advanced Technology Program, NIST GCR 97-708, December 1996. 8 Even if a new technology funded by the ATP results in large societal net benefits, this does not mean that the program has been successful unless a significant part of the net return is attributable to the ATP.
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Page 219 VALUING HEALTH BENEFITS When a medical innovation results in an improvement in patient well-being, tracing a person's quality of life with and without the technology is required to value these benefits. The health state of any individual at any time is made up of his/her physical, psychological, and social functioning levels. Central to the study's evaluation of benefits from improvements in a patient's well-being are two concepts: Quality-Adjusted Life-Year (QALY) and value of life. QALY is an approach to quantifying health benefits to the individual in terms of the quantity and quality of life. 9 A year of life in full health is given a QALY value of 1.0; death is given a QALY value of 0.0; and a year of life at less than full health is given a QALY value between 0.0 and 1.0. QALY values for selected health states are reported in health assessment literature. For example, living with mild angina has been assigned a QALY value of 0.90, and severe angina, a QALY of 0.50. 10 QALY values assigned to different health states are derived from averages of survey results for relevant populations. Technology changes the availability of therapies and alters likely health outcomes. QALY values allow the analyst to quantify health improvements by accounting for changes in quantity and quality of life in a single measure. We model the progression of chronic diseases treated by the tissue engineering projects as a Markow process where patients transition from one health state to the next over time. Health states are modeled throughout the remainder of patient statistical lives. Acute illness and injury are modeled as a single-period case of the chronic disease model. QALYs are valued by scaling estimates of the value of a life-year in perfect health, obtained from economic studies of willingness to pay for such an outcome. “Value of life” means the value of a statistical life as indicated by a collective willingness to pay to avoid fatality risks. 11 We derived the value of a life year in perfect health from the value of a statistical life, this value is applied to the QALY changes associated with ATP support of each tissue engineering technology. 12 The return on investment is expressed both in terms of NPV and as a percentage rate of return. Because of the uncertainty in project outcomes, substantial sensitivity analysisis employed. 9 George W. Torrance and David Feeny, “Utilities and Quality-Adjusted Life Years,” International Journal of Technology Assessment in Health Care, 5:559-575. 10 Ibid. 11 See Josephine A. Mauskopf and Michael T. French, “Estimating the Value of Avoiding Morbidity and Mortality from Foodborne Illnesses,” Risk Analysis 11(4):619-631; and Michael J. Moore and W. Kip Viscusi, “The Quantity-Adjusted Value of Life,” Economic Inquiry 26(3):369-388. 12 For additional description of the use of QALY values and value of life data, see A.J. Wang, “Key Concepts in Evaluating Outcomes of ATP Funding of Medical Technologies,” Special Issue Editor: Rosalie Ruegg, Journal of Technology Transfer, 23(2):61-65.
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Page 220 FINDINGS The general findings for the seven tissue engineering projects are as follows: The projects all have expected social returns much larger than their private returns, primarily due to projected positive spillovers to patients treated with the new technologies. ATP played a significant role in increasing the expected returns on these projects to the developers and to society at large by accelerating the R&D phase of the projects and improving the probability of technical success. Significant shares of the expected total social returns from the projects are attributable to the ATP. The expected return on ATP funding of the projects demonstrates a wide range of values, from about 20 percent to over 100 percent per annum over the projected time horizon. Projects that provide a relatively higher expected social return on investment have the following characteristics: They apply to a large number of patients. They have significantly better health outcomes than the defender technology. They are cost-effective when compared to the defender technology. They have a greater expected probability of technical success. More specifically, Table 2 shows both the expected social return on investment and the expected social return on public investment (i.e., that part attributed to ATP funding) for each of the projects examined. The last row of the tablet shows the results for all of the projects taken together, i.e., the composite return. 13 The projects are projected to generate approximately $34 billion (NPV) in social return on public investment over a 20-year study period (encompassing all phases from R&D through commercial use). ATP funding is estimated to induce about 31 percent of the total social returns from all seven projects over the study period. For the individual projects, the effect of ATP on social returns ranges from about 25 to 100 percent of the social returns. TABLE 2 Social Return on Investment and Social Return on Public Investment: ATP Projects in Tissue Engineering for a Single Preliminary Application Expected Social Return on Investment Expected Social Return on Public Investment ATP Project NPV (1996$ millions) IRR (%) NPV (1996$ millions) IRR (%) Stem Cell Expansion 134 20 47 21 Biopolymers for Tissue Repair a 98 51 98 51 Living Implantable Microreactors 74,518 149 17,750 148 Proliferated Human Islets 2,252 36 1,297 34 Biomaterials for Clinical Prosthesis 32,855 118 15,058 128 Gene Therapy Applications 2,411 106 945 111 Universal Donor Organs 2,838 91 783 92 Composite 109,229 115 34,258 116 a For Biopolymers, the two sets of figures are identical because all of the social return can be attributed to ATP investment.
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Page 221 Social returns to these projects vary with such factors as the number of patients treated, the value of the health benefits of the new technology, their impact on health-care costs, and the probability of technical success. “Stem Cell Expansion” and “Biopolymers for Tissue Repair” include health-care cost savings but no health well-being benefits due to the unavailability of QALY data for the associated health effects. The projects “Living Implantable Microreactors” and “Proliferated Human Islets” provide similar health benefits but differ with respect to their impact on health-care costs and their probability of technical success. LIMITATIONS We recognize the conjectural nature of our findings and limitations of our methodology. Modeling the entire process from R&D to health outcomes obviously entails the use of a large amount of estimated data and the use of assumptions when data are lacking. Much of the data were, as it must be, gathered from the firms supported by the ATP and from other key participants in the medical care sector. Only time will tell if the expectations of these firms are fully realized. Despite the limitations, this approach provides a useful framework for evaluating ATP contributions to social welfare from funding medical technology. The framework requires that the analyst explicitly examine the entire process from R&D to patients with injuries and illnesses who would receive treatments based on the new technologies if they are successfully commercialized and diffused. The approach is based on widely accepted economic reasoning to develop estimates of the impacts of ATP funding on project timing and success. It incorporates spillovers, and employs counterfactuals for comparison of the with- and without-ATP-funding scenarios. It uses sensitivity analysis to reflect uncertainties. And, it employs traditional valuation metrics to value the social-welfare implications of the impacts. 13 We calculate the composite measure of NPV for the seven case-study projects by summing the total expected benefits and costs (negative values) for each year for all the projects and discounting the resulting amounts over a time period that covered the life of all projects.
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Page 222 REFERENCES Bass, Frank M. 1969 . “A New Product Growth Model for Consumer Durables.” Management Science 15(5): 215-227 . Binswanger, Hans P. 1978 . “The Microeconomics of Induced Technical Change,” in Induced Innovation . Hans P. Binswanger and Vernon Ruttan, eds. Baltimore : Johns Hopkins University Press . Jaffe, Adam B. 1996 . Economic Analysis of Research Spillovers: Implications for the Advanced Technology Program . NIST GCR 97-708. December. Mansfield, Edwin. 1996 . Estimating Social and Private Returns from Innovations Based on the Advanced Technology Program: Problems and Opportunities . NIST GCR 99-780. January. Martin, Sheila A. et al., Research Triangle Institute . 1998 . A Framework for Estimating the National Economic Benefits of ATP Funding of Medical Technologies . NIST GCR 97-737. April. Mauskopf, Josephine A. and Michael T. French. 1991 . “Estimating the Value of Avoiding Morbidity and Mortality from Foodborne Illnesses.” Risk Analysis 11(4): 619-631 Moore, Michael J. and W. Kip Viscusi. 1988 . “The Quantity-Adjusted Value of Life.” Economic Inquiry 26(3): 369-388 . National Institute of Standards and Technology. ATP Website. http://www.atp.gov . Torrance, George W. and David Feeny. 1989 . “Utilities and Quality-Adjusted Life Years.” International Journal of Technology Assessment in Health Care 5: 559-575 . Wang, Andrew. 1998 . “Key Concepts in Evaluating Outcomes of ATP Funding of Medical Technologies.” Special Issue Editor: Rosalie Ruegg. Journal of Technology Transfer 23(2-Summer): 61-65 .
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