The effort to discover and develop new pharmaceuticals is a risky and costly enterprise. For diseases that affect few patients, the barriers to development maybe especially great, since the drugs' small markets may make it difficult for firms to recoup their initial research and development investments. The Federal Government has sought to reduce these barriers through incentives first adopted in the Orphan Drug Act of 1983 (Public Law 97-414). The transfer of technology from Federal laboratories such as the National Institutes of Health to the pharmaceutical industry can also reduce the cost and risk of drug development for firms. Although such incentives may result in important new therapies, their price to patients and insurers may still be high.

As part of our assessment, Government Policies and Pharmaceutical Research and

Development, requested by the House Committee on Energy and Commerce and its

Subcommittee on Health and the Environment and the Subcommittee on Antitrust,

Monopolies, and Business Rights of the Senate Committee on the Judiciary, OTA

commissioned researchers at Stanford University to examine the development and provision of alglucerase, an important new treatment for Gaucher disease. Gaucher disease is a rare inherited disorder in which the body lacks an enzyme necessary to break down fats. This background paper describes the development of alglucerase, illustrates the role that both the Federal Government and private sector can have in making new therapies available for orphan diseases, and lays out some of the tradeoffs that can exist between developing new medical technologies and controlling health care costs.

The adoption by Medicare in 1983 of prospective payment using diagnosis-related groups (DRGs) has stimulated research to develop case-mix grouping schemes that more accurately predict resource consumption by patients. In this article, the authors explore a new method designed to improve case-mix classification for newborns through the use of birth weight in combination with DRGs to adjust the unexplained case-mix severity. Although the findings are developmental in nature, they reveal that the model significantly improves our ability to explain resource use.

The authors apply a conditional choice model to simulate the results of patient and physician choices of hospitals for a specific surgical procedure in response to improvements in quality or changes in charges. The model includes all zip code areas and relevant hospitals in a large metropolitan area and estimates the impact on admissions at each hospital. It can be used to estimate both the impact of decisions by a given hospital and the potential responses of competitors, as well as the effects of selective contracting with hospitals by certain payors.

One of the most striking pieces of medical news in the 1980s revealed the connection between high blood cholesterol and a person's likelihood of developing coronary artery disease. In 1985, the National Heart, Lung, and Blood Institute of the National Institutes of Health began the National Cholesterol Education Program, whose goal was to develop a national policy for reducing serum cholesterol. However, the panel that convened to formulate recommendations for screening and treatment was instructed not to consider cost in its deliberations. As Alan Garber and Judy Wagner point out in this article, failure to include costs in the development of guidelines such as these can have "far-reaching, unanticipated effects." This point is especially relevant to the new Agency for Health care Policy and Research (AHCPR) , which was formed as part of the 1989 budget reconciliation law. One of AHCPR's express mandates is to develop condition-specific treatment guidelines for nationwide use. "If the AHCPR guidelines show the same disregard for costs" that the cholesterol guidelines showed, the authors state, "they cannot be expected to guide health dollars to their most effective use."

If a person were faced with a medical problem requiring a risky operation, it would be natural, even prudent, for that person to want to know the comparative experience with the procedure (as shown by annual volumes) and the relative success with which area hospitals perform the operation. Unfortunately, such information is often impossible for the average consumer or even the average employee benefits manager to obtain.

Various studies have shown that certain complicated procedures are volume-sensitive. That is, when hospitals perform higher volumes of the procedure, morality rates and charges decline. This relationship is said to reflect experience and economies of scale. While some argue that such quality and cost information can easily be misinterpreted, consumers deserve as much information as can be made available to help them determine where to obtain care. Unfortunately, hospitals believe that information regarding their quality and efficiency is proprietary and should not be released, and they have been quite successful at guarding hospital-specific information.

In recent years, much information has been provided to the public and to physicians about hospital quality measured in terms of patient outcomes. To examine if, before these public data releases, quality influenced the attractiveness of a hospital to referring or admitting physicians and to patients, we estimated the influences of quality, charges, ownership, and distance on the choice of hospitals for patients with seven surgical procedures and five medical diagnoses in hospitals in three geographic areas in California in 1983. Greater distance and public or proprietary ownership consistently reduced the likelihood of selection while medical school affiliation increased the likelihood of selection. For five of seven surgical procedures and two of five medical diagnoses, hospitals with poorer than expected outcomes attracted significantly fewer admissions. The reverse held for two surgical procedures and one medical diagnosis. The results suggest that quality played an important role in choices among hospitals even before explicit data were widely available.