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Surplus Appropriation from R&D and Health Care Technology Assessment Procedures

Author

Listed:
  • Tomas J. Philipson

    (University of Chicago)

  • Anupam B. Jena

    (University of Chicago)

Abstract

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.

Suggested Citation

  • Tomas J. Philipson & Anupam B. Jena, 2005. "Surplus Appropriation from R&D and Health Care Technology Assessment Procedures," Public Economics 0511021, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwppe:0511021
    Note: Type of Document - doc; pages: 27
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    References listed on IDEAS

    as
    1. Meltzer, David, 1997. "Accounting for future costs in medical cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 33-64, February.
    2. 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 Elsevier.
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    5. 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.
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    9. Alan M. Garber, 1999. "Advances in Cost-Effectiveness Analysis of Health Interventions," NBER Working Papers 7198, National Bureau of Economic Research, Inc.
    10. William D. Nordhaus, 2004. "Schumpeterian Profits in the American Economy: Theory and Measurement," NBER Working Papers 10433, National Bureau of Economic Research, Inc.
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    14. 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, Specia), pages 783-832.
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    Cited by:

    1. Philipson Tomas J & Jena Anupam B, 2006. "Who Benefits from New Medical Technologies? Estimates of Consumer and Producer Surpluses for HIV/AIDS Drugs," Forum for Health Economics & Policy, De Gruyter, vol. 9(2), pages 1-33, January.
    2. Tomas J. Philipson & Eric Sun, 2008. "Is the Food And Drug Administration Safe And Effective?," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 85-102, Winter.
    3. Pedro Pita Barros & Xavier Martinez-Giralt, 2009. "Technological adoption in health care," UFAE and IAE Working Papers 790.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. Barros Pedro Pita & Martinez-Giralt Xavier, 2015. "Technological Adoption in Health Care – The Role of Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(2), pages 709-745, April.
    5. Paul Grootendorst, 2012. "Prescription Drug Insurance and Reimbursement," Chapters,in: The Elgar Companion to Health Economics, Second Edition, chapter 11 Edward Elgar Publishing.
    6. Fimpel, Julia & Stolpe, Michael, 2006. "The welfare costs of HIV/AIDS in Eastern Europe: An empirical assessment using the economic value-of-life approach," Kiel Working Papers 1297, Kiel Institute for the World Economy (IfW).
    7. Tomas Philipson & Stephane Mechoulan & Anupam Jena, 2006. "Health Care, Technological Change, and Altruistic Consumption Externalities," NBER Working Papers 11930, National Bureau of Economic Research, Inc.
    8. Lakdawalla, Darius & Sood, Neeraj, 2009. "Innovation and the welfare effects of public drug insurance," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 541-548, April.

    More about this item

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • H - Public Economics

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