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Did Medicare Induce Pharmaceutical Innovation?

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  • Acemoglu, Daron
  • Finkelstein, Amy
  • Cutler, David
  • Linn, Joshua

Abstract

The introduction of Medicare in 1965 was the single largest change in health insurance coverage in U.S. history. Many economists and commentators have conjectured that the introduction of Medicare may have also been an important impetus for the development of new drugs that are now commonly used by the elderly and have substantially extended their life expectancy. In this paper, we investigate whether Medicare induced pharmaceutical innovations directed towards the elderly. Medicare could have played such a role only if two conditions were met. First, Medicare would have to increase drug spending by the elderly. Second, the pharmaceutical companies would have to respond to the change in market size for drugs caused by Medicare by changing the direction of their research. Our empirical work finds no evidence of a "first-stage" effect of Medicare on prescription drug expenditure by the elderly. Correspondingly, we also find no evidence of a shift in pharmaceutical innovation towards therapeutic categories most used by the elderly. On the whole, therefore, our evidence does not provide support for the hypothesis that Medicare had a major effect on the direction of pharmaceutical innovation.

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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 2664267.

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Date of creation: 2006
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Publication status: Published in American Economic Review
Handle: RePEc:hrv:faseco:2664267

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  1. Daron Acemoglu & David Cutler & Amy Finkelstein & Joshua Linn, 2006. "Did Medicare Induce Pharmaceutical Innovation?," NBER Working Papers, National Bureau of Economic Research, Inc 11949, National Bureau of Economic Research, Inc.
  2. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," Levine's Working Paper Archive, David K. Levine 228400000000000002, David K. Levine.
  3. Amy Finkelstein, 2005. "The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare," NBER Working Papers, National Bureau of Economic Research, Inc 11619, National Bureau of Economic Research, Inc.
  4. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G. & Lasagna, Louis, 1991. "Cost of innovation in the pharmaceutical industry," Journal of Health Economics, Elsevier, Elsevier, vol. 10(2), pages 107-142, July.
  5. Amy Finkelstein & Robin McKnight, 2005. "What Did Medicare Do (And Was It Worth It)?," NBER Working Papers, National Bureau of Economic Research, Inc 11609, National Bureau of Economic Research, Inc.
  6. Wooldridge, J.M., 1990. "Distribution-Free Estimation Of Some Nonlinear Panel Data Models," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 564, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Jerry A. Hausman & Bronwyn H. Hall & Zvi Griliches, 1984. "Econometric Models for Count Data with an Application to the Patents-R&D Relationship," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0017, National Bureau of Economic Research, Inc.
  8. Ariel Pakes & Zvi Griliches, 1980. "Patents and R and D at the Firm Level: A First Look," NBER Working Papers, National Bureau of Economic Research, Inc 0561, National Bureau of Economic Research, Inc.
  9. Amy Finkelstein, 2004. "Static and Dynamic Effects of Health Policy: Evidence From the Vaccine Industry," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(2), pages 527-564, May.
  10. Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262640589, December.
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Cited by:
  1. Werfel, Seth H. & Jaffe, Adam B., 2013. "Induced innovation and technology trajectory: Evidence from smoking cessation products," Research Policy, Elsevier, Elsevier, vol. 42(1), pages 15-22.
  2. Acemoglu, Daron & Finkelstein, Amy & Cutler, David & Linn, Joshua, 2006. "Did Medicare Induce Pharmaceutical Innovation?," Scholarly Articles, Harvard University Department of Economics 2664267, Harvard University Department of Economics.
  3. Nawaz, Saima, 2011. "The Institutions-Growth Nexus: Stages of Development," MPRA Paper, University Library of Munich, Germany 36961, University Library of Munich, Germany.
  4. Lei Ji, 2013. "Rethinking directed technical change with endogenous market structure," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2013-18, Observatoire Francais des Conjonctures Economiques (OFCE).
  5. Volker Grossmann, 2011. "Do Cost-sharing and Entry Deregulation Curb Pharmaceutical Innovation?," CESifo Working Paper Series, CESifo Group Munich 3439, CESifo Group Munich.
  6. Moshe Levy & Adi Rizansky, 2014. "Market failure in the pharmaceutical industry and how it can be overcome: the CureShare mechanism," The European Journal of Health Economics, Springer, Springer, vol. 15(2), pages 143-156, March.
  7. Amitabh Chandra & Jonathan S. Skinner, 2011. "Technology Growth and Expenditure Growth in Health Care," NBER Working Papers, National Bureau of Economic Research, Inc 16953, National Bureau of Economic Research, Inc.

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