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The Insurance Value of Medical Innovation

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  • Darius Lakdawalla
  • Anup Malani
  • Julian Reif

Abstract

Economists think of medical innovation as a valuable but risky good, producing health benefits but increasing financial risk. 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 aspects of value and links them to the value of health insurance. We show that any innovation worth buying reduces overall risk, thereby generating positive insurance value on its own. We conduct two empirical exercises to assess the significance of our insights. First, we calculate that conventional methods underestimate the value of historical health gains by 30-80%. Second, we examine a large set of medical technologies and calculate that insurance value on average adds 100% to the conventional valuation of those treatments. Moreover, we find that the physical risk-reduction value of these technologies is ten times greater than the financial risk they pose and the corresponding value of health insurance that insures this financial risk. Our analysis also suggests standard methods disproportionately undervalue treatments for the most severe illnesses, where physical risk to consumers is most costly.

Suggested Citation

  • Darius Lakdawalla & Anup Malani & Julian Reif, 2015. "The Insurance Value of Medical Innovation," NBER Working Papers 21015, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21015
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    2. Lakdawalla, Darius N. & Phelps, Charles E., 2020. "Health technology assessment with risk aversion in health," Journal of Health Economics, Elsevier, vol. 72(C).
    3. Jeroen P. Jansen & Devin Incerti & Mark T. Linthicum, 2019. "Developing Open-Source Models for the US Health System: Practical Experiences and Challenges to Date with the Open-Source Value Project," PharmacoEconomics, Springer, vol. 37(11), pages 1313-1320, November.
    4. Peter Tsasis & Nirupama Agrawal & Natalie Guriel, 2019. "An Embedded Systems Perspective in Conceptualizing Canada’s Healthcare Sustainability," Sustainability, MDPI, Open Access Journal, vol. 11(2), pages 1-11, January.
    5. Devin Incerti & Jeffrey R. Curtis & Jason Shafrin & Darius N. Lakdawalla & Jeroen P. Jansen, 2019. "A Flexible Open-Source Decision Model for Value Assessment of Biologic Treatment for Rheumatoid Arthritis," PharmacoEconomics, Springer, vol. 37(6), pages 829-843, June.
    6. Besanko, David & Dranove, David & Garthwaite, Craig, 2020. "Insurance access and demand response: Pricing and welfare implications," Journal of Health Economics, Elsevier, vol. 73(C).
    7. Shafrin, Jason & Skornicki, Michelle & Brauer, Michelle & Villeneuve, Julie & Lees, Michael & Hertel, Nadine & Penrod, John R. & Jansen, Jeroen, 2018. "An exploratory case study of the impact of expanding cost-effectiveness analysis for second-line nivolumab for patients with squamous non-small cell lung cancer in Canada: Does it make a difference?," Health Policy, Elsevier, vol. 122(6), pages 607-613.
    8. Daniel Bauer & Darius Lakdawalla & Julian Reif, 2018. "Mortality Risk, Insurance, and the Value of Life," NBER Working Papers 25055, National Bureau of Economic Research, Inc.
    9. Darius N. Lakdawalla & Charles E. Phelps, 2019. "Evaluation of Medical Technologies with Uncertain Benefits," NBER Working Papers 26058, National Bureau of Economic Research, Inc.
    10. Proksch, Dorian & Busch-Casler, Julia & Haberstroh, Marcus Max & Pinkwart, Andreas, 2019. "National health innovation systems: Clustering the OECD countries by innovative output in healthcare using a multi indicator approach," Research Policy, Elsevier, vol. 48(1), pages 169-179.

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    More about this item

    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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