The value of medical innovation versus industry rewards

December 1, 2022
Hospital, Surgical light, on

This article was originally published in the American Journal of Health Economics.

Given the rapid growth in healthcare spending that is often attributed to technological change, many private and public institutions are grappling with how to best assess and adopt new healthcare technologies. As a consequence, many payers are concerned with the pricing of new technologies and patients are paying too much relative to their value in promoting better health. Indeed, although it is recognized that medical innovations have produced enormous health gains for patients, these innovations are often criticized for their high cost and their role in rising healthcare spending.

Nevertheless, there is little systematic evidence of how the costs of these innovations relate to the value that patients gain from them. The purpose of this article is to provide systematic evidence on this issue. More precisely, we provide systematic evidence on what share of the value of health generated by drugs and other healthcare interventions accrues to patients on the demand side versus the manufacturers on the supply side.

We provide a novel methodology to assess this issue by showing how a large data set of > 9000 cost-effectiveness (CE) measures of various interventions from Tufts Cost-Effectiveness Analysis (CEA) Registry can be converted into measures of the shares of the value appropriated by the supply versus the demand side. Using these data, our main finding is that, after controlling for disease category, if patients value a quality-adjusted life-year (QALY) at $450 000, the median share appropriated for drugs is approximately 6% and has declined at 0.1% per year between 1997 and 2019. This compares with other healthcare interventions that have a median value of 9% but decline at 0.3% per year over the same period.

Our analysis provides a conservative upper bound on the share appropriated by the supply side given that only part of the value or total surplus of the interventions is captured. In our analysis, the value of the interventions is only tied to changes in observable changes in mortality and morbidity, ignoring other value dimensions such as externalities outside of the patient population (eg, nonpatient benefactors from vaccines) or other patient value attributes not captured by QALYs. In addition, our estimates are an upper bound of profit appropriation by innovators given that profits are always less than revenue, taking out fixed and variable costs of production (here due to mainly research and development [R&D] costs and manufacturing costs of interventions) and rebates, discounts, and price concessions made by innovators.