An extension of the real option approach to the evaluation of health care technologies: the case of positron emission to
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An extension of the real option approach to the evaluation of health care technologies: the case of positron emission tomography Paolo Pertile
Received: 16 February 2007 / Accepted: 30 December 2008 / Published online: 18 January 2009 © Springer Science+Business Media, LLC 2009
Abstract This paper aims to incorporate option values into the economic evaluation of positron emission tomography (PET). The installation of this equipment requires a substantial capital outlay, while uncertainty, especially regarding the possibility of new applications, is relevant, because the evidence available is still insufficient. Treating the number of examinations to provide as a stochastic variable, the cost–effectiveness analysis is extended to include the value of flexibility both with respect to the timing of investment and to the size of the project. The threshold values of the stochastic variable that ensure the cost–effectiveness of a PET scan according to this approach are obtained as a function of the value of the incremental effectiveness. Keywords
Cost–effectiveness analysis · Real options · Positron emission tomography
JEL Classification
C61 · D61 · D81 · I12
Introduction Since the end of the 1970s the literature on real options has been challenging the standard approach to the economic evaluation under uncertainty based on net expected values. The idea is that the naïve approach fails to take into account the implicitly dynamic structure of decisions related to irreversible investments when some form of flexibility is embedded in the project. It is often the case, for instance, that the investment decision can be postponed. Building on the analogy with financial options, since the information available at different points in time is not the same, having an opportunity but not an obligation to invest has a value per se. This should be explicitly included in a comprehensive measure of the value of the project.
P. Pertile (B) Department of Law and Economics, University of Verona, Via dell’Artigliere 19, 37129 Verona, Italy e-mail: [email protected]
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The impact of this extension on “capital budgeting” has been significant in the private sector.1 The potential relevance of real options for the evaluation of health care technologies has been discussed by Palmer and Smith (2000). The combination of rapid innovation and limited evidence, which is typical for most medical technologies, makes uncertainty a key issue for the economic evaluation. If there are no costs of reversal, the adoption decision can be kept separate from the decision to acquire more information (Claxton 1999). However, irreversibility is often substantial for health care technologies. Unless the decision is actually “now or never”, the static criterion based on incremental cost–effectiveness ratios (ICER) may be an inadequate tool to deal with uncertainty and irreversibility. These characteristics may coexist both at a macro-level and at the micro-level of the patient. The first case is typical for investment in new equipment
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