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.