Investment in health technologies in a competitive model with real options

This paper studies the optimal timing of investment in innovative technology by health care providers competing for patients, in a real option framework. 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 operational costs. Since further development of the technology is expected to improve eciency over time, each provider faces a trade-o between gaining a competitive advantage by investing first, and fully exploiting the option to delay investment under uncertainty. The model is set up so that the role of the payment system on investment decisions may be investigated. This turns out not to be always intuitive. In particular, it is showed that a more generous scheme does not always induce to anticipate investment. By comparing the competitive solution with the social optimal timing, some policy implications are finally discussed.