How much are new treatments worth?
Healthcare absorbs an ever-growing percentage of national income and public spending in many developed countries. In the United States, for example, healthcare expenditures escalated from 7 percent of the country’s gross domestic product (GDP) in 1970 to almost 20 percent in 2013. Across member countries of the Organisation for Economic Co-operation and Development, healthcare expenditures more than doubled from an average of 4.9 percent of GDP in 1970 to over 10 percent today.
Given the financial squeeze of increasing healthcare expenditures on public budgets, governments must decide whether to allocate scarce public dollars toward healthcare or other investments important to society, including education, defense, retirement benefits or public infrastructure. In order to make these difficult decisions, however, policymakers need to understand the value of spending money in each of these areas. Is the dollar value that Americans place on additional investments in healthcare greater or less than the value they place on additional investments in all other areas in which the government can invest?
Deciding whether to devote more or less to healthcare depends critically on the ability to accurately quantify the value of health improvements that greater spending provides. Without being able to quantify the value of improved health, it is impossible for policymakers to decide whether investments in the health sector are worth it.
Needing New Numbers
The science of valuing and measuring the worth of healthcare has a long tradition and is constantly evolving. In fact, health economics expends much of its efforts on precisely this area. Nonetheless, the approach has been limited in our view. Many public and private payers use technology assessments to quantify the health impacts of new technologies for their patients by comparing patient benefits from a given technology with spending on that technology. For example, many studies compare spending to quality- or disability-adjusted life years gained. Although such consumer- or patient-based measurements provide a guide to allocating the often-scarce resources spent on medical technologies, less emphasis has been placed on the effect that such measurements have on the behavior of innovators who make healthcare technologies available in the first place.
We have explored the impact of innovation on both patients and innovators.1,2 Although not explicitly stated as such, patient-based measurements of the value of new healthcare technologies are concerned with maximizing the gains to consumers rather than producers. From this perspective, a technology’s worth depends on the value of patient health benefits versus the cost. The gains to patients or consumers, however, might be a poor guide to developing efficient policies to drive new technologies that arise from costly R&D. Rather, the degree to which a producer gains—often at the expense of consumers—becomes the central issue that determines dynamic incentives to innovate.
The importance of producer gains from new innovations is the rationale for the patent system, which substitutes producer gains for consumer gains in order to stimulate more efficient R&D investment. Put differently, even though measured levels of patient gains would be larger today without patents, since patients or their health plans would spend less to get the same technology, future patients would suffer from a lack of innovation incentives. Unfortunately, the measurement of the gains to innovators has greatly lagged behind the measurement of the gains to patients in health economics. The field needs an improved science for measuring the gains for producers of new healthcare technologies.
Consequently, we and others have explored producer gains in healthcare. For example, we have estimated the gains to patients as well as innovators of highly active anti-retroviral therapy (HAART) for HIV/AIDS.3 Today, individuals diagnosed with HIV in the United States can have near-normal life expectancies, if they adhere to their medications. In contrast, those diagnosed with HIV in the mid-1980s faced five-year mortality rates of about 80 percent. Our research estimated that life expectancy—across the more than 1.5 million individuals diagnosed with HIV in the United States since 1984—increased by nearly five years when averaged across all of these patients (those diagnosed before 1996 when HAART became available, as well those diagnosed after). Using a typical value of US$100,000 for a year of life, improvements in HIV survival have been worth about $750 billion until now (1.5 million times 5 years at $100,000). Including the benefits to future patients would make that number much larger.
To date, the gains to HIV patients have swamped the gains to innovators, because the drugs have lead to profits of approximately US$5 billion a year, which we have shown accounts for only 7 percent of the total value of these drugs. The point of this back-of-the-envelope calculation is not to argue that it is exact or fully correct but that the difference between patient and innovator gains is very large, a finding that has important implications for whether innovators have the full incentives to innovate.
The HIV indication illustrates a more general set of findings that have been repeated in oncology and hypertension and many other diseases.4 Indeed, in our work on HIV drugs, we also used the Tufts Medical Center Cost Effectiveness Analysis Registry to study a large sample of medical technologies, and we found that an average innovator only captured 12 percent of a technology’s total value. This figure is about half that estimated for other industries,5 even though healthcare is among the most research intensive, requiring nearly US$1 billion worth of investment for every drug that successfully makes it to market.
Measuring the value of innovations can help to guide our understanding of whether healthcare spending is producing improvements that patients value and whether incentives are sufficient for innovators to generate new therapies. But in order to understand whether current public policies create incentives for future innovation, it is important to measure how the value of new treatments is divided between the patients who receive them and the companies that produce them. In order for policymakers to understand whether the right incentives exist for innovation, it’s important to measure not only the value of new medicines to today’s patients but also the gains to producers who make cutting-edge therapies possible for patients in the future.
1. Jena, A.B. & Philipson, T. Health Aff. 26, 696–703 (2007).
2. Jena, A.B. & Philipson T.J. J. Health Econ. 27, 1224–1236 (2008).
3. Philipson, T. & Jena, A. Forum for Health Economics & Policy, 2006. doi: 10.2202/1558-9544.1005
4. Lakdawalla, D.N. et al. J. Health Econ. 29, 333–346 (2010).
5. Mansfield, E. et al. Quarterly Journal of Economics 91, 221–240 (1997).
Tomas J. Philipson is the Daniel Levin Professor of Public Policy Studies at the University of Chicago, and Anupam B. Jena is an assistant professor of healthcare policy and medicine at Harvard Medical School. Both are members of Precision Health Economics, which consults to private and public payers as well as product manufacturers.
Enhanced with a new guidebook and region-specific ratings, the 2016 Scorecard ventures deeper than ever to track down the latest in biotech innovation