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The Insurance Value of Medical Innovation

The Insurance Value of Medical Innovation. Darius Lakdawalla Anup Malani Julian Reif USC and NBER University of Chicago University of Illinois. Consider a standard coin toss gamble. Risk matters when evaluating payoffs.

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The Insurance Value of Medical Innovation

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  1. The Insurance Value of Medical Innovation Darius Lakdawalla Anup Malani Julian Reif USC and NBER University of Chicago University of Illinois

  2. Consider a standard coin toss gamble Risk matters when evaluating payoffs

  3. Valuing medical technology: Gleevec for treatment of chronic myeloid leukemia Technology may produce “self-insurance” value

  4. Valuing medical technology: Highly Active Antiretroviral Therapy (HAART) for HIV Technology may produce “market insurance” value

  5. Risk-reduction value of technology raises several research questions • How can we define and measure the risk-reduction value of medical technology? • Under what conditions is it appropriate to abstract away from risk-reduction value? • How empirically significant is risk-reduction value over a range of real-world medical technologies? • What are the implications for how we value and pay for different types of medical technologies?

  6. Value of medical technology can be intuitively illustrated in a simple two-good model • Imagine that utility depends on consumption and health for a (weakly) risk-averse consumer • There are two health states – “sick” and “well” – and the risk, , of the “sick” state in which: • Consumption endowments fall to • Health endowments fall to • There exists some medical technology sold at price that raises health in the sick state to

  7. Intuition can be illustrated in a one-good model

  8. Conventional “risk-free” value is the movement along the original expected utility chord Traditional value

  9. Additional “self-insurance” value accounts for the movement up the risk-averse utility curve Self-insurance value

  10. Additional “market insurance” value accounts for the incremental value of financially insuring the technology Market-insurance value

  11. Traditional valuations ignore the “insurance value” Insurance value Traditional value Insurance value is the sum of self insurance and market insurance

  12. Results from theoretical analysis • Three separate components of value: • Traditional Value of Technology • Corresponds to the “risk-free” value • Self-Insurance Value of Technology (SIVT) • Market-Insurance Value of Technology (MIVT) • Accounting for only the traditional valuation causes researcher to underestimate the total value of technology • This underestimate is particularly bad for severe diseases with low quality of life, i.e., high “unmet need”

  13. Empirical framework is based on Cobb-Douglas utility • Consider the two-good version of the model implied by: • measures quality of life, and is consumption • determines the MRS between consumption and health – i.e., the willingness to pay for health improvement • determines the demand for insurance – the higher is , the greater the demand for insurance

  14. Parameterizing the utility function • We pick a baseline value of equal to 0.3 • We calibrate using estimates of risk-aversion • Baseline value of 3 (implies relative risk-aversion equal to 1.6) • We set annual income equal to $50,000 • We obtain measures of price and quality of life from data on cost-effectiveness studies • Uses the “QALY” framework • Quality of life ranges from 0 to 1

  15. “Cost-effectiveness” of technology drives variation in the risk-free and insurance values Simulated estimates of RFVT, SIVT, and MIVT as a function of price. Total = RFVT + SIVT + MIVT. Parameters are = 0.3, =$50,000, = 1, = 0.7, and = 0.1.

  16. Value of health technology is right-skewed

  17. Value of health technology is right-skewed

  18. Insurance value dominated by self-insurance and comparable in magnitude to risk-free value

  19. Providing special reimbursement for treating diseases with high unmet need remains controversial • “[The fund] not only undermines NICE, it undermines the entire concept of a rational and evidence-based approach to the allocation of finite health-care resources.” • “New cancer treatments clearly challenge the cost thresholds set by NICE”

  20. Self insurance value (SIV) is large for diseases with high unmet need

  21. Treating diseases with unmet needs – e.g., cancer – is much more valuable than previously recognized HIV/AIDS Gleevec Alzheimer’s

  22. Policy implications of risk-reduction value • Economic value of health increases may be larger than previously thought • Greater expenditures on health-related research may be worthwhile • Health technology assessment • Risk-reduction value should be incorporated into value assessments • Treatments for diseases with high unmet need are especially undervalued, perhaps by an order of magnitude

  23. Reexamining the role of medical innovation • Policies to promote new health technology also function like insurance reform • Financial markets may have played a secondary role in reducing society’s exposure to health risk • The distributional implications of health technologies have been poorly understood • The poor benefit disproportionately from health risk-reduction (McClellan and Skinner, 2006) • Access to medical technology is a policy substitute for financial redistribution or means-tested health insurance

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