Medical Innovation with Competing Risks: Theory and Evidence

Alexander Olssen, Health Care Management, The Wharton School

Abstract: Are private and social incentives for medical innovation aligned? This question is important because improvements in health have been a major source of increases in human well-being. This paper explores an unexamined reason why firms may underinvest in medical innovation: they do not appropriately account for competing risks. Existing evidence shows that competing risks affect social incentives for medical innovation. Specifically, Honore and Lleras-Muney (2005) show that the social value of treating cancer (in terms of survival) is much larger in 2000 than in 1970 because of progress made in treating heart disease. However, there is no evidence that examines whether private and social investments in medical innovation appropriately account for the presence of competing risks. I will use data on cause-specific mortality (from the CDC) for several decades to estimate a model of competing risks. I will relate changes in the value of improved cause-specific treatments (accounting for competing risks) cause-specific private investments (measured by the quantity of clinical trials in Cortellis data) and cause-specific social investments (measured by NIH funding). At the margin, increases in the value of cause-specific innovation should increase both private and social investment. I will investigate this empirically.