Surplus Appropriation from R&D and Health Care Technology Assessment Procedures
Given the rapid growth in health care spending that is often attributed to technological change, many private and public institutions are grappling with how to best assess and adopt new health care technologies. The leading technology adoption criteria proposed in theory and used in practice involve so called "cost-effectiveness" measures. However, little is known about the dynamic efficiency implications of such criteria, in particular how they influence the R&D investments that make technologies available in the first place. We argue that such criteria implicitly concern maximizing consumer surplus, which many times is consistent with maximizing static efficiency after an innovation has been developed. Dynamic efficiency, however, concerns aligning the social costs and benefits of R&D and is therefore determined by how much of the social surplus from the new technology is appropriated as producer surplus. We analyze the relationship between cost-effectiveness measures and the degree of surplus appropriation by innovators driving dynamic efficiency. We illustrate how to estimate the two for the new HIV/AIDS therapies that entered the market after the late 1980's and find that only 5% of the social surplus is appropriated by innovators. We show how this finding can be generalized to other existing cost-effectiveness estimates by deriving how those estimates identify innovator appropriation for a set of studies of over 200 drugs. We find that these studies implicitly support a low degree of appropriation as well. Despite the high annual cost of drugs to patients, very low shares of social surplus may go to innovators, which may imply that cost-effectiveness is too high in a dynamic efficiency sense.
|Date of creation:||Feb 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David Meltzer, 1997. "Accounting for Future Costs in Medical Cost-Effectiveness Analysis," NBER Working Papers 5946, National Bureau of Economic Research, Inc.
- William D. Nordhaus, 2004.
"Schumpeterian Profits in the American Economy: Theory and Measurement,"
Cowles Foundation Discussion Papers
1457, Cowles Foundation for Research in Economics, Yale University.
- William D. Nordhaus, 2004. "Schumpeterian Profits in the American Economy: Theory and Measurement," NBER Working Papers 10433, National Bureau of Economic Research, Inc.
- Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-23, December.
- Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1988. "Appropriating the Returns from Industrial R&D," Cowles Foundation Discussion Papers 862, Cowles Foundation for Research in Economics, Yale University.
- Tomas Philipson, 1999.
"Economic Epidemiology and Infectious Diseases,"
NBER Working Papers
7037, National Bureau of Economic Research, Inc.
- Mansfield, Edwin, et al, 1977. "Social and Private Rates of Return from Industrial Innovations," The Quarterly Journal of Economics, MIT Press, vol. 91(2), pages 221-40, May.
- Alan M. Garber, 1999. "Advances in Cost-Effectiveness Analysis of Health Interventions," NBER Working Papers 7198, National Bureau of Economic Research, Inc.
- Meltzer, David, 1997. "Accounting for future costs in medical cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 33-64, February.
- Weinstein, Milton C. & Manning, Willard Jr., 1997. "Theoretical issues in cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 121-128, February.
- repec:cup:cbooks:9780521833165 is not listed on IDEAS
- repec:cup:cbooks:9780521540674 is not listed on IDEAS
- Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 783-832.
- 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.
- 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.
- Darius Lakdawalla & Tomas Philipson & Y. Richard Wang, 2006. "Intellectual Property and Marketing," NBER Working Papers 12577, National Bureau of Economic Research, Inc.
- Frank R. Lichtenberg, 2006. "The Impact of Increased Utilization of HIV Drugs on Longevity and Medical Expenditures: An Assessment Based on Aggregate U.S. Time-Series Data," NBER Working Papers 12406, National Bureau of Economic Research, Inc.
- Manning, Richard L, 1994. "Changing Rules in Tort Law and the Market for Childhood Vaccines," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 247-75, April.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:12016. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.