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The Welfare Effects of Public Drug Insurance

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  • Darius Lakdawalla
  • Neeraj Sood

Abstract

Rewarding 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13501.

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Date of creation: Oct 2007
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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.
Handle: RePEc:nbr:nberwo:13501

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  1. 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.
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  6. Darius Lakdawalla & Neeraj Sood, 2006. "Health Insurance as a Two-Part Pricing Contract," NBER Working Papers 12681, National Bureau of Economic Research, Inc.
  7. Klemperer, Paul, 1990. "How Broad Should the Scope of Patent Protection Be?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 392, C.E.P.R. Discussion Papers.
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Cited by:
  1. Tomas J. Philipson & George Zanjani, 2013. "Economic Analysis of Risk and Uncertainty induced by Health Shocks: A Review and Extension," NBER Working Papers 19005, National Bureau of Economic Research, Inc.
  2. 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, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2010-14, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  3. Grossmann, Volker, 2013. "Do cost-sharing and entry deregulation curb pharmaceutical innovation?," Journal of Health Economics, Elsevier, Elsevier, vol. 32(5), pages 881-894.
  4. Jay Bhattacharya & Mikko Packalen, 2008. "The Other Ex-Ante Moral Hazard in Health," NBER Working Papers 13863, National Bureau of Economic Research, Inc.
  5. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2013. "The dynamics of pharmaceutical regulation and R&D investments," Working Papers 13/2013, University of Verona, Department of Economics.
  6. Patricia M. Danzon & Adrian K. Towse & Jorge Mestre-Ferrandiz, 2012. "Value-Based Differential Pricing: Efficient Prices for Drugs in a Global Context," NBER Working Papers 18593, National Bureau of Economic Research, Inc.
  7. Jeffrey Clemens, 2013. "The Effect of U.S. Health Insurance Expansions on Medical Innovation," NBER Working Papers 19761, National Bureau of Economic Research, Inc.

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