This week we will introduce financial valuation techniques. We will begin by describing the roles of financial risk and the opportunity cost of time. These concepts are essential for valuing investments. We will focus on two specific techniques, net present value and the internal rate of return. These techniques are fundamental to corporate finance. With slight modifications, they can be used to solve a massive number of healthcare problems.

The cost of pharmaceutical Research & Development (R&D) is, arguably, the most controversial topic in healthcare finance and economics. We focus our discussion on DiMasi and colleagues’ 2016 study of pharmaceutical R&D costs. This is, essentially, an application of our discounted cash flow techniques. In addition to applying financial techniques, this example illustrates common challenges of deciding which cash flows are relevant and what is the right cost of capital.

This week examines healthcare mergers and acquisitions. This is especially important given the massive and ongoing consolidation in the U.S. healthcare market. We will discuss merger motivations and their consequences for the cost and quality of healthcare. We will also examine valuation techniques for mergers. The process is, at one level, a straightforward financial model solved with discounted cash flow techniques. But we also demonstrate how these models serve as tools for strategic decision making and bargaining.