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Most Downloaded Articles
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- Price Shopping in Consumer-Directed Health Plans by Sood, Neeraj/ Wagner, Zachary/ Huckfeldt, Peter and Haviland, Amelia M.
- High US Health-Care Spending and the Importance of Provider Payment Rates by Anderson, Gerard/ Chalkidou, Kalipso and Herring, Bradley
- The Business Case for Diabetes Disease Management for Managed Care Organizations by Beaulieu, Nancy/ Cutler, David M/ Ho, Katherine/ Isham, George/ Lindquist, Tammie/ Nelson, Andrew and O'Connor, Patrick
- A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets by Berndt, Ernst R./ McGuire, Thomas and Newhouse, Joseph P.
The Option Value of Innovation
1Precision Health Economics, email@example.com
2University of Southern California, firstname.lastname@example.org
3University of Georgia, email@example.com
4University of Chicago, firstname.lastname@example.org
Citation Information: Forum for Health Economics & Policy. Volume 15, Issue 2, Pages –, ISSN (Online) 1558-9544, DOI: 10.1515/1558-9544.1306, April 2012
- Published Online:
Standard techniques of cost effectiveness analysis measure a technology’s benefits in terms of expected life years (or quality-adjusted life years) gained at today’s life expectancies. However, this approach ignores the gains which derive from the possibility that a health technology allows an individual to survive long enough to benefit from other technological innovations which raise life expectancy (and quality of life) in the future. Borrowing a term from the finance literature, we refer to this source of value as the “option value” of innovation. We explain where this value comes from and how to calculate it in a variety of standard cost effectiveness analysis contexts. We provide a proof-of-concept using the example of the drug tamoxifen, which delayed the onset of breast cancer for some patients until more effective adjuvant treatment was available. We find that incorporating option value can increase the conventionally estimated value of tamoxifen with better adjuvant treatment by nearly a quarter (from $200,000 to $248,000 for those who initiated tamoxifen in 1999). We expect similar results for other drugs in therapeutic areas of rapid technological advancement.