The insurance value of medical innovation

Darius Lakdawalla, Anup Malani, Julian Reif

Research output: Contribution to journalArticlepeer-review


Economists think of medical innovation as a valuable but risky good, producing health benefits but increasing financial risk for consumers and healthcare payers. This perspective overlooks how innovation can lower physical risks borne by healthy patients facing the prospect of future disease. We present an alternative framework that accounts for all these sources of value and links them to the value of healthcare insurance. We show that any innovation worth buying reduces overall risk and generates positive insurance value on its own. We conduct a stylized numerical exercise to assess the potential empirical significance of our insights. Our calculations suggest that conventional methods meaningfully understate the value of historical health gains and disproportionately undervalue treatments for the most severe illnesses, where physical risk to consumers is the costliest. These calculations also suggest that the value of physical insurance from new technologies may exceed the financial spending risk that they pose.

Original languageEnglish (US)
Pages (from-to)94-102
Number of pages9
JournalJournal of Public Economics
StatePublished - Jan 1 2017


  • Cost-benefit analysis
  • Health insurance
  • Medical innovation
  • Value of health

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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