Financial Health Economics
78 Pages Posted: 20 Apr 2014 Last revised: 22 Jan 2015
Date Written: January 21, 2015
We provide a theoretical and empirical analysis of the link between financial and real health care markets. This link is important as financial returns drive investment in medical research and development (R&D), which in turn, affects real spending growth. We document a "medical innovation premium" of 4-6% annually for equity returns of firms in the health care sector. We interpret this premium as compensating investors for government-induced profit risk, and we provide supportive evidence for this hypothesis through company filings and abnormal return patterns surrounding threats of government intervention. We quantify the implications of the premium for the growth in real health care spending by calibrating our model to match historical trends, predicting a long run share of 34%. Policies that had removed government risk would have led to more than a doubling of medical R&D and would have increased the current share of health care spending by nearly 4% of GDP.
Keywords: Health economics, Health care spending, Medical innovation, Risk premium
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