Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Health Economics

Sharing R&D Risk in Healthcare via FDA Hedges

Adam Jørring, Andrew W. Lo, Tomas Philipson, Manita Singh, Richard Thakor

The high cost of capital for firms conducting medical research and development (R&D) has been partly attributed to the government risk facing investors in medical innovation. This risk slows down medical innovation because investors must be compensated for it. We propose new and simple financial instruments, Food and Drug Administration (FDA) hedges, to allow medical R&D investors to better share the pipeline risk associated with FDA approval with broader capital markets.

Equilibrium Provider Networks: Bargaining and Exclusion in Health Care Markets

Kate Ho and Robin S. Lee

Why do insurers choose to exclude medical providers, and when would this be socially desirable? We examine network design from the perspective of a profit maximizing insurer and a social planner in order to evaluate the effects of narrow networks and restrictions on their use—a form of quality regulation. An insurer may wish to exclude hospitals in order to steer patients to less expensive providers, cream-skim enrollees, and negotiate lower reimbursement rates.