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The insurance value of medical innovation

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  • Lakdawalla, Darius
  • Malani, Anup
  • Reif, Julian

Abstract

Economists think of medical innovation as a valuable but risky good, producing health benefits but increasing financial risk for consumers and healthcare payers. This perspective overlooks how innovation can lower physical risks borne by healthy patients facing the prospect of future disease. We present an alternative framework that accounts for all these sources of value and links them to the value of healthcare insurance. We show that any innovation worth buying reduces overall risk and generates positive insurance value on its own. We conduct a stylized numerical exercise to assess the potential empirical significance of our insights. Our calculations suggest that conventional methods meaningfully understate the value of historical health gains and disproportionately undervalue treatments for the most severe illnesses, where physical risk to consumers is the costliest. These calculations also suggest that the value of physical insurance from new technologies may exceed the financial spending risk that they pose.

Suggested Citation

  • Lakdawalla, Darius & Malani, Anup & Reif, Julian, 2017. "The insurance value of medical innovation," Journal of Public Economics, Elsevier, vol. 145(C), pages 94-102.
  • Handle: RePEc:eee:pubeco:v:145:y:2017:i:c:p:94-102
    DOI: 10.1016/j.jpubeco.2016.11.012
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    2. repec:eee:hepoli:v:122:y:2018:i:6:p:607-613 is not listed on IDEAS
    3. Baranov, Victoria & Bennett, Daniel & Kohler, Hans-Peter, 2015. "The indirect impact of antiretroviral therapy: Mortality risk, mental health, and HIV-negative labor supply," Journal of Health Economics, Elsevier, vol. 44(C), pages 195-211.
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    More about this item

    Keywords

    Cost-benefit analysis; Health insurance; Medical innovation; Value of health;

    JEL classification:

    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • J17 - Labor and Demographic Economics - - Demographic Economics - - - Value of Life; Foregone Income
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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