The Value of Medical Innovation Versus Industry Rewards

This article provides systematic evidence on the share of the value of health generated by drugs and other healthcare goods and services that accrue to patients on the demand side versus the manufacturers on the supply side.

We exploit a large data set with > 9000 cost-effectiveness measures for various interventions, which we convert into measures of the shares of the value of improved health appropriated by the supply side using literature estimates of how patients value gains in health.

We find that if patients value a quality-adjusted life-year at $450 000 the median share appropriated for drugs on the supply side is approximately 6% and has declined at 0.1% per year between 1997 and 2019. This compares with other healthcare interventions, such as screenings or medical procedures, which have a median value of 9% but decline at 0.3% per year over the same period. If patients value a quality-adjusted life-year at $150 000, the median share appropriated for drugs and other healthcare interventions on the supply side is approximately 18% and 27%, respectively. Our estimates of appropriations are upper bounds, partly due to QALYs not capturing full producer value.

Many policy debates center on the idea that the supply side is capturing too much of the value of the medical innovation that they generate. We find that, for these interventions, a large share of the value of medical innovation accrues to patients on the demand side given that the revenue to innovators is often far less than the patient's value of these medical innovations.