IDEAS home Printed from https://ideas.repec.org/a/bpj/fhecpo/v15y2012i2n5.html
   My bibliography  Save this article

The Option Value of Innovation

Author

Listed:
  • Thornton Snider Julia

    (Precision Health Economics, julia@precisionhealtheconomics.com)

  • Romley John A.

    (University of Southern California, romley@healthpolicy.usc.edu)

  • Vogt William B.

    (University of Georgia, wbvogt@uga.edu)

  • Philipson Tomas J.

    (University of Chicago, t-philipson@uchicago.edu)

Abstract

Standard techniques of cost effectiveness analysis measure a technology’s benefits in terms of expected life years (or quality-adjusted life years) gained at today’s life expectancies. However, this approach ignores the gains which derive from the possibility that a health technology allows an individual to survive long enough to benefit from other technological innovations which raise life expectancy (and quality of life) in the future. Borrowing a term from the finance literature, we refer to this source of value as the “option value” of innovation. We explain where this value comes from and how to calculate it in a variety of standard cost effectiveness analysis contexts. We provide a proof-of-concept using the example of the drug tamoxifen, which delayed the onset of breast cancer for some patients until more effective adjuvant treatment was available. We find that incorporating option value can increase the conventionally estimated value of tamoxifen with better adjuvant treatment by nearly a quarter (from $200,000 to $248,000 for those who initiated tamoxifen in 1999). We expect similar results for other drugs in therapeutic areas of rapid technological advancement.

Suggested Citation

  • Thornton Snider Julia & Romley John A. & Vogt William B. & Philipson Tomas J., 2012. "The Option Value of Innovation," Forum for Health Economics & Policy, De Gruyter, vol. 15(1), pages 1-19, April.
    • Handle: RePEc:bpj:fhecpo:v:15:y:2012:i:2:n:5
    DOI: 10.1515/1558-9544.1306
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/1558-9544.1306
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/1558-9544.1306?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gary S. Becker & Tomas J. Philipson & Rodrigo R. Soares, 2005. "The Quantity and Quality of Life and the Evolution of World Inequality," American Economic Review, American Economic Association, vol. 95(1), pages 277-291, March.
    2. Philipson Tomas J & Jena Anupam B, 2006. "Who Benefits from New Medical Technologies? Estimates of Consumer and Producer Surpluses for HIV/AIDS Drugs," Forum for Health Economics & Policy, De Gruyter, vol. 9(2), pages 1-33, January.
    3. Meltzer, David, 1997. "Accounting for future costs in medical cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 33-64, February.
    4. Nancy Devlin & David Parkin, 2004. "Does NICE have a cost‐effectiveness threshold and what other factors influence its decisions? A binary choice analysis," Health Economics, John Wiley & Sons, Ltd., vol. 13(5), pages 437-452, May.
    5. Johannesson, Magnus & Weinstein, Milton C., 1993. "On the decision rules of cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 12(4), pages 459-467, December.
    6. Tomas J. Philipson & Gary Becker & Dana Goldman & Kevin M. Murphy, 2010. "Terminal Care and The Value of Life Near Its End," NBER Working Papers 15649, National Bureau of Economic Research, Inc.
    7. David Meltzer, 1997. "Accounting for Future Costs in Medical Cost-Effectiveness Analysis," NBER Working Papers 5946, National Bureau of Economic Research, Inc.
    8. Garber, Alan M. & Phelps, Charles E., 1997. "Economic foundations of cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 1-31, February.
    9. Giaccotto, Carmelo & Santerre, Rexford E & Vernon, John A, 2005. "Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry," Journal of Law and Economics, University of Chicago Press, vol. 48(1), pages 195-214, April.
    10. Refoios Camejo, Rodrigo & McGrath, Clare & Herings, Ron, 2011. "A dynamic perspective on pharmaceutical competition, drug development and cost effectiveness," Health Policy, Elsevier, vol. 100(1), pages 18-24, April.
    11. John A. Vernon, 2005. "Examining the link between price regulation and pharmaceutical R&D investment," Health Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-16, January.
    12. Thomas A. Abbott & John A. Vernon, 2007. "The cost of US pharmaceutical price regulation: a financial simulation model of R&D decisions," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 293-306.
    13. Jeff Richardson & Erik Nord, 1997. "The importance of Perspective in the Measurement of Quality-adjusted Life Years," Medical Decision Making, , vol. 17(1), pages 33-41, February.
    14. Tomas J. Philipson & Gary Becker & Dana Goldman & Kevin M. Murphy, 2010. "Terminal Care and The Value of Life Near Its End," NBER Working Papers 15649, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Woojung Lee & William B. Wong & Stacey Kowal & Louis P. Garrison & David L. Veenstra & Meng Li, 2022. "Modeling the Ex Ante Clinical Real Option Value in an Innovative Therapeutic Area: ALK-Positive Non-Small-Cell Lung Cancer," PharmacoEconomics, Springer, vol. 40(6), pages 623-631, June.
    3. Meng Li & Anirban Basu & Caroline S. Bennette & David L. Veenstra & Louis P. Garrison, 2019. "Do cancer treatments have option value? Real‐world evidence from metastatic melanoma," Health Economics, John Wiley & Sons, Ltd., vol. 28(7), pages 855-867, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Philipson Tomas J & Jena Anupam B, 2006. "Who Benefits from New Medical Technologies? Estimates of Consumer and Producer Surpluses for HIV/AIDS Drugs," Forum for Health Economics & Policy, De Gruyter, vol. 9(2), pages 1-33, January.
    2. David Canning, 2013. "Axiomatic Foundations For Cost‐Effectiveness Analysis," Health Economics, John Wiley & Sons, Ltd., vol. 22(12), pages 1405-1416, December.
    3. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2008. "Longevity bias in cost‐effectiveness analysis," Health Economics, John Wiley & Sons, Ltd., vol. 17(4), pages 523-534, April.
    4. Mark Sculpher & David Torgerson & Ron Goeree & Bernie O'Brien, 1999. "A critical structured review of economic evaluations of interventions for the prevention and treatment of osteoporosis," Working Papers 169chedp, Centre for Health Economics, University of York.
    5. Tomas J. Philipson & Gary Becker & Dana Goldman & Kevin M. Murphy, 2010. "Terminal Care and The Value of Life Near Its End," NBER Working Papers 15649, National Bureau of Economic Research, Inc.
    6. Daniel Grima & Lisa Bernard & Elizabeth Dunn & Philip McFarlane & David Mendelssohn, 2012. "Cost-Effectiveness Analysis of Therapies for Chronic Kidney Disease Patients on Dialysis," PharmacoEconomics, Springer, vol. 30(11), pages 981-989, November.
    7. Tomas J. Philipson & Anupam B. Jena, 2005. "Surplus Appropriation from R&D and Health Care Technology Assessment Procedures," Public Economics 0511021, University Library of Munich, Germany.
    8. Jena, Anupam B. & Philipson, Tomas J., 2008. "Cost-effectiveness analysis and innovation," Journal of Health Economics, Elsevier, vol. 27(5), pages 1224-1236, September.
    9. Jena, Anupam B. & Philipson, Tomas J., 2013. "Endogenous cost-effectiveness analysis and health care technology adoption," Journal of Health Economics, Elsevier, vol. 32(1), pages 172-180.
    10. Karl Claxton & Mike Paulden & Hugh Gravelle & Werner Brouwer & Anthony J. Culyer, 2011. "Discounting and decision making in the economic evaluation of health‐care technologies," Health Economics, John Wiley & Sons, Ltd., vol. 20(1), pages 2-15, January.
    11. Alan M. Garber, 1999. "Advances in Cost-Effectiveness Analysis of Health Interventions," NBER Working Papers 7198, National Bureau of Economic Research, Inc.
    12. Pieter H. M. van Baal & Talitha L. Feenstra & Rudolf T. Hoogenveen & G. Ardine de Wit & Werner B. F. Brouwer, 2007. "Unrelated medical care in life years gained and the cost utility of primary prevention: in search of a ‘perfect’ cost–utility ratio," Health Economics, John Wiley & Sons, Ltd., vol. 16(4), pages 421-433, April.
    13. Moreno Gigi & van Eijndhoven Emma & Benner Jennifer & Sullivan Jeffrey, 2017. "The Long-Term Impact of Price Controls in Medicare Part D," Forum for Health Economics & Policy, De Gruyter, vol. 20(2), pages 1-56, December.
    14. Mira Johri & Laura J. Damschroder & Brian J. Zikmund‐Fisher & Peter A. Ubel, 2005. "The importance of age in allocating health care resources: does intervention‐type matter?," Health Economics, John Wiley & Sons, Ltd., vol. 14(7), pages 669-678, July.
    15. Gary Becker & Kevin Murphy & Tomas Philipson, 2007. "The Value of Life Near its End and Terminal Care," Levine's Working Paper Archive 122247000000001428, David K. Levine.
    16. Eric Budish & Benjamin Roin & Heidi Williams, 2013. "Do fixed patent terms distort innovation? Evidence from cancer clinical trials," Discussion Papers 13-001, Stanford Institute for Economic Policy Research.
    17. Joel Thompson & Amir Abdolahi & Katia Noyes, 2013. "Modelling the Cost Effectiveness of Disease-Modifying Treatments for Multiple Sclerosis," PharmacoEconomics, Springer, vol. 31(6), pages 455-469, June.
    18. Lakdawalla, Darius N. & Sun, Eric C. & Jena, Anupam B. & Reyes, Carolina M. & Goldman, Dana P. & Philipson, Tomas J., 2010. "An economic evaluation of the war on cancer," Journal of Health Economics, Elsevier, vol. 29(3), pages 333-346, May.
    19. Pieter H. M. van Baal & Talitha L. Feenstra & Johan J. Polder & Rudolf T. Hoogenveen & Werner B. F. Brouwer, 2011. "Economic evaluation and the postponement of health care costs," Health Economics, John Wiley & Sons, Ltd., vol. 20(4), pages 432-445, April.
    20. Kenkel, Don, 1997. "On valuing morbidity, cost-effectiveness analysis, and being rude," Journal of Health Economics, Elsevier, vol. 16(6), pages 749-757, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:fhecpo:v:15:y:2012:i:2:n:5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.