Investment in health technologies in a competitive model with real options

This paper adopts a real options approach to study the optimal timing of investment in new technologies by health care providers competing for patients and the role of alternative payment systems in the adoption decision. The innovative technology provides a better health outcome, thus attracting a larger number of patients. On the other hand, at the early stages of innovation it is assumed to involve a larger degree of uncertainty and higher costs. The role of the payment system turns out not always to be intuitive. In particular, it is shown that a more generous scheme does not always induce earlier investment. By comparing the competitive solution with the social optimal timing, some policy implications are finally discussed