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How excluding some benefits from value assessment of new drugs impacts innovation

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  • Joseph P. Cook
  • Joseph Golec

Abstract

Payers often assess the benefits of new drugs relative to costs for reimbursement purposes, but they frequently exclude some drugs' option‐related benefits, reducing their reimbursement chances, and making them less attractive R&D investments. We develop and test a real options model of R&D investment that shows that excluding option‐related benefits heightens drug developers' incentives to avoid high‐risk (volatile) R&D investments and instead encourages them to focus on “safer” (positively skewed) investments. Our model and empirical results could partly explain the decline in the number of risky new molecular entities.

Suggested Citation

  • Joseph P. Cook & Joseph Golec, 2017. "How excluding some benefits from value assessment of new drugs impacts innovation," Health Economics, John Wiley & Sons, Ltd., vol. 26(12), pages 1813-1825, December.
    • Handle: RePEc:wly:hlthec:v:26:y:2017:i:12:p:1813-1825
    DOI: 10.1002/hec.3507
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    References listed on IDEAS

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