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Forum for Health Economics & Policy

Editor-in-Chief: Goldman, Dana / Romley, John

CiteScore 2018: 0.89

SCImago Journal Rank (SJR) 2018: 0.314
Source Normalized Impact per Paper (SNIP) 2018: 0.548

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The Option Value of Innovation

Julia Thornton Snider / John A. Romley / William B. Vogt / Tomas J. Philipson
Published Online: 2012-04-18 | DOI: https://doi.org/10.1515/1558-9544.1306

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.

Keywords: innovation; pharmaceutical; medicine; option value; cancer

About the article

Published Online: 2012-04-18

Citation Information: Forum for Health Economics & Policy, Volume 15, Issue 2, ISSN (Online) 1558-9544, DOI: https://doi.org/10.1515/1558-9544.1306.

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©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston.Get Permission

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