The Insurance Value of Medical Innovation

Technological change in healthcare is often viewed as a major contributor to increased financial risk, since new technologies are often more expensive than old ones.  While true in a static sense, this viewpoint overlooks the manner in which medical innovations reduce the health risk borne by consumers.  First, using the parlance of Ehrlich and Becker (1972), therapeutic technologies serve as “self-insurance” that lowers the impact of illness and preventative technologies serve as “self-protection” that lowers the probability of illness.  Second, given the incompleteness of real-world financial markets, medical technologies improve the performance of health insurance and annuity contracts (“market insurance”) that transfer wealth across morbidity and mortality states.  We show that standard methods of valuing medical technologies overlook these insurance benefits from technology.  As a result, standard approaches may underestimate the value of medical technology that improves quality of life, and may under or overestimate the value of life-extending technology, depending on whether longevity risks are less insured than mortality risks.  Using data from the Tufts Cost-Effectiveness Registry, we estimate total insurance value for a range of real-world medical technologies.  We estimate that the total insurance value adds 166% to the traditional valuation.  Moreover, for typical levels of risk-aversion, the total insurance value of technology is roughly seven times the total insurance value of health insurance itself.