The Insurance Value of Medical Innovation
37 Pages Posted: 16 Mar 2015 Last revised: 25 Mar 2015
Date Written: March 2015
Economists think of medical innovation as a valuable but risky good, producing health benefits but increasing financial risk. This perspective overlooks how innovation can lower physical risks borne by healthy patients facing the prospect of future disease. We present an alternative framework that accounts for all these aspects of value and links them to the value of health insurance. We show that any innovation worth buying reduces overall risk, thereby generating positive insurance value on its own. We conduct two empirical exercises to assess the significance of our insights. First, we calculate that conventional methods underestimate the value of historical health gains by 30-80%. Second, we examine a large set of medical technologies and calculate that insurance value on average adds 100% to the conventional valuation of those treatments. Moreover, we find that the physical risk-reduction value of these technologies is ten times greater than the financial risk they pose and the corresponding value of health insurance that insures this financial risk. Our analysis also suggests standard methods disproportionately undervalue treatments for the most severe illnesses, where physical risk to consumers is most costly.
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