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Price Indices and the Value of Innovation with Heterogenous Patients

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  • Lucarelli, Claudio
  • Nicholson, Sean
  • Tilipman, Nicholas

Abstract

Many countries use uniform cost-effectiveness criteria to determine whether to adopt a new medical technology for the entire population. This approach assumes homogeneous preferences for expected health benefits and side effects. We examine whether new prescription drugs generate welfare gains when accounting for heterogeneous preferences by constructing quality-adjusted price indices in the market for colorectal cancer drug treatments. We find that while the efficacy gains from newer drugs do not justify high prices for the population as a whole, innovation improves the welfare of sicker, late-stage cancer patients. A uniform evaluation criterion would not permit these innovations despite welfare gains to a subpopulation.

Suggested Citation

  • Lucarelli, Claudio & Nicholson, Sean & Tilipman, Nicholas, 2022. "Price Indices and the Value of Innovation with Heterogenous Patients," Journal of Health Economics, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:jhecon:v:84:y:2022:i:c:s0167629622000443
    DOI: 10.1016/j.jhealeco.2022.102625
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    More about this item

    Keywords

    Innovation; Cost-of-living; Healthcare cost; Heterogeneity;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being
    • L00 - Industrial Organization - - General - - - General

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