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. We argue that popular assessment criteria going under the rubric of “cost-effectiveness” often 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 estimate that for the HIV/AIDS therapies that entered the market from the late 1980’s onwards, producers appropriated only 5% of the social surplus arising from these new technologies. We show how to translate standard findings of cost- effectiveness to estimates of innovator appropriation for standard studies of over 200 drugs, and find that these studies implicitly support a low degree of appropriation as well. Despite the high annual costs of drugs to patients, the low share of social surplus going to innovators raises concerns about advocating cost-effectiveness criteria that would further reduce appropriation by innovators, and hence further reduce dynamic efficiency by unduly sacrificing future patients’ health for current ones.
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.
- 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.
- 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.
- 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.
- 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.
- Philipson, Tomas, 2000.
"Economic epidemiology and infectious diseases,"
Handbook of Health Economics,
in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 33, pages 1761-1799
- 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.
- 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.
- 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.
- William D. Nordhaus, 2004.
"Schumpeterian Profits in the American Economy: Theory and Measurement,"
NBER Working Papers
10433, 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.
- Mansfield, Edwin, 1985. "How Rapidly Does New Industrial Technology Leak Out?," Journal of Industrial Economics, Wiley Blackwell, vol. 34(2), pages 217-23, December.
- repec:cup:cbooks:9780521833165 is not listed on IDEAS
- Alan M. Garber, 1999. "Advances in Cost-Effectiveness Analysis of Health Interventions," NBER Working Papers 7198, 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.
- repec:cup:cbooks:9780521540674 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwppe:0511021. 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: (EconWPA)
If references are entirely missing, you can add them using this form.