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Updated: Sep 23, 2025

The Innovation Arena: A Method for Comparing Innovative Problem-Solving Across Groups
Published on: May 13, 2022
Price Indices and the Value of Innovation with Heterogenous Patients
Claudio Lucarelli1, Sean Nicholson2, Nicholas Tilipman3
1Department of Health Care Management, The Wharton School, University of Pennsylvania.
Abstract:
Many countries use uniform cost-effectiveness criteria to determine whether to adopt a new medical technology for the entire population. This approach assumes homogeneous preferences for expected health benefits and side effects. We examine whether new prescription drugs generate welfare gains when accounting for heterogeneous preferences by constructing quality-adjusted price indices in the market for colorectal cancer drug treatments. We find that while the efficacy gains from newer drugs do not justify high prices for the population as a whole, innovation improves the welfare of sicker, late-stage cancer patients. A uniform evaluation criterion would not permit these innovations despite welfare gains to a subpopulation.
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