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The Option Value of Innovation

Author

Listed:
  • Thornton Snider Julia

    (Precision Health Economics)

  • Romley John A.

    (University of Southern California)

  • Vogt William B.

    (University of Georgia)

  • Philipson Tomas J.

    (University of Chicago)

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(2), pages 1-19, April.
    • Handle: RePEc:bpj:fhecpo:v:15:y:2012:i:2:n:5
    DOI: 10.1515/1558-9544.1306
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    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.

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