The Welfare Effects of Public Drug Insurance
AbstractRewarding inventors with inefficient monopoly power has long been regarded as the price of encouraging innovation. Public prescription drug insurance escapes that trade-off and achieves an elusive goal: lowering static deadweight loss, while simultaneously encouraging dynamic investments in innovation. As a result of this feature, the public provision of drug insurance can be welfare-improving, even for risk-neutral and purely self-interested consumers. In spite of its relatively low benefit levels, the Medicare Part D benefit generate $3.5 billion of annual static deadweight loss reduction, and at least $2.8 billion of annual value from extra innovation. These two components alone cover 87% of the social cost of publicly financing the benefit. The analysis of static and dynamic efficiency also has implications for policies complementary to a drug benefit: in the context of public monopsony power, some degree of price-negotiation by the government is always strictly welfare-improving, but this should often be coupled with extensions in patent length.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13501.
Date of creation: Oct 2007
Date of revision:
Publication status: published as Lakdawalla, Darius & Sood, Neeraj, 2009. "Innovation and the welfare effects of public drug insurance," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 541-548, April.
Note: HC HE PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
- I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-20 (All new papers)
- NEP-HEA-2007-10-20 (Health Economics)
- NEP-IAS-2007-10-20 (Insurance Economics)
- NEP-IPR-2007-10-20 (Intellectual Property Rights)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carl Shapiro, 2007.
"Patent Reform: Aligning Reward and Contribution,"
NBER Working Papers
13141, National Bureau of Economic Research, Inc.
- Amitabh Chandra & Jonathan Gruber & Robin McKnight, 2007. "Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly," NBER Working Papers 12972, National Bureau of Economic Research, Inc.
- Martin Feldstein, 1999.
"Tax Avoidance And The Deadweight Loss Of The Income Tax,"
The Review of Economics and Statistics,
MIT Press, vol. 81(4), pages 674-680, November.
- Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
- Garber Alan M & Jones Charles I. & Romer Paul, 2006.
"Insurance and Incentives for Medical Innovation,"
Forum for Health Economics & Policy,
De Gruyter, vol. 9(2), pages 1-27, March.
- Daron Acemoglu & Joshua Linn, 2004.
"Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry,"
The Quarterly Journal of Economics,
MIT Press, vol. 119(3), pages 1049-1090, August.
- Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," Levine's Working Paper Archive 228400000000000002, David K. Levine.
- Daron Acemoglu & Joshua Linn, 2003. "Market Size in Innovation: Theory and Evidence From the Pharmaceutical Industry," NBER Working Papers 10038, National Bureau of Economic Research, Inc.
- Lakdawalla, Darius & Sood, Neeraj, 2013.
"Health insurance as a two-part pricing contract,"
Journal of Public Economics,
Elsevier, vol. 102(C), pages 1-12.
- Paul Klemperer, 1990.
"How Broad Should the Scope of Patent Protection Be?,"
RAND Journal of Economics,
The RAND Corporation, vol. 21(1), pages 113-130, Spring.
- Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers 392, C.E.P.R. Discussion Papers.
- William D. Nordhaus, 2004.
"Schumpeterian Profits in the American Economy: Theory and Measurement,"
NBER Working Papers
10433, National Bureau of Economic Research, Inc.
- William D. Nordhaus, 2004. "Schumpeterian Profits in the American Economy: Theory and Measurement," Cowles Foundation Discussion Papers 1457, Cowles Foundation for Research in Economics, Yale University.
- Gilbert, R. & Shapiro, C., 1988.
"Optimal Patent Length And Breadth,"
28, Princeton, Woodrow Wilson School - Discussion Paper.
- DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
- Jay Bhattacharya & Mikko Packalen, 2008.
"The Other Ex-Ante Moral Hazard in Health,"
NBER Working Papers
13863, National Bureau of Economic Research, Inc.
- Claudio Lucarelli & Jeffrey Prince & Kosali Simon, 2012.
"The Welfare Impact Of Reducing Choice In Medicare Part D: A Comparison Of Two Regulation Strategies,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1155-1177, November.
- Claudio Lucarelli & Jeffrey T. Prince & Kosali Simon, 2009. "The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies," Working Papers 2010-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
- Claudio Lucarelli & Jeffrey Prince & Kosali Simon, 2008. "The Welfare Impact of Reducing Choice in Medicare Part D: A Comparison of Two Regulation Strategies," NBER Working Papers 14296, National Bureau of Economic Research, Inc.
- Grossmann, Volker, 2013.
"Do cost-sharing and entry deregulation curb pharmaceutical innovation?,"
Journal of Health Economics,
Elsevier, vol. 32(5), pages 881-894.
- Volker Grossmann, 2011. "Do Cost-sharing and Entry Deregulation Curb Pharmaceutical Innovation?," CESifo Working Paper Series 3439, CESifo Group Munich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.