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Insurance and Incentives for Medical Innovation

Author

Listed:
  • Garber Alan M

    () (Dept. of Veterans Affairs, Stanford University, and NBER)

  • Jones Charles I.

    () (University of California, Berkeley and NBER)

  • Romer Paul

    () (Stanford University and NBER)

Abstract

This paper studies the interactions between health insurance and the incentives for innovation. Although we focus on pharmaceutical innovation, our discussion applies to other industries producing novel technologies for sale in markets with subsidized demand. Standard results in the growth and productivity literatures suggest that firms in many industries may possess inadequate incentives to innovate. Standard results in the health literature suggest that health insurance leads to the overutilization of health care. Our study of innovation in the pharmaceutical industry emphasizes the interaction of these incentives. Because of the large subsidies to demand from health insurance, limits on the lifetime of patents and possibly limits on monopoly pricing may be necessary to ensure that pharmaceutical companies do not possess excess incentives for innovation.

Suggested Citation

  • 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.
  • Handle: RePEc:bpj:fhecpo:v:biomedical_research:y:2006:n:4
    as

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    References listed on IDEAS

    as
    1. Martin Gaynor & Deborah Haas-Wilson & William B. Vogt, 2000. "Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 992-1005, October.
    2. Philipson Tomas J & Jena Anupam B, 2006. "Who Benefits from New Medical Technologies? Estimates of Consumer and Producer Surpluses for HIV/AIDS Drugs," Forum for Health Economics & Policy, De Gruyter, vol. 9(2), pages 1-33, January.
    3. Yongsung Chang & Sun-Bin Kim, 2006. "From Individual To Aggregate Labor Supply: A Quantitative Analysis Based On A Heterogeneous Agent Macroeconomy ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 1-27, February.
    4. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Oxford University Press, vol. 68(1), pages 205-229.
    5. Darius Lakdawalla & Neeraj Sood, 2005. "Insurance and Innovation in Health Care Markets," NBER Working Papers 11602, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jena, Anupam B. & Philipson, Tomas J., 2008. "Cost-effectiveness analysis and innovation," Journal of Health Economics, Elsevier, vol. 27(5), pages 1224-1236, September.
    2. Grossmann, Volker, 2013. "Do cost-sharing and entry deregulation curb pharmaceutical innovation?," Journal of Health Economics, Elsevier, vol. 32(5), pages 881-894.
    3. Ernst R. Berndt & Joseph P. Newhouse, 2010. "Pricing and Reimbursement in U.S. Pharmaceutical Markets," NBER Working Papers 16297, National Bureau of Economic Research, Inc.
    4. Darius Lakdawalla & Neeraj Sood, 2007. "The Welfare Effects of Public Drug Insurance," NBER Working Papers 13501, National Bureau of Economic Research, Inc.
    5. Anirban Basu & David Meltzer, 2012. "Private Manufacturers’ Thresholds to Invest in Comparative Effectiveness Trials," PharmacoEconomics, Springer, vol. 30(10), pages 859-868, October.
    6. Charles I. Jones, 2006. "The Value of Information in Growth and Development," Working Papers 032006, Hong Kong Institute for Monetary Research.
    7. Sebastian Böhm & Volker Grossmann & Holger Strulik, 2018. "R&D-Driven Medical Progress, Health Care Costs, and the Future of Human Longevity," CESifo Working Paper Series 6897, CESifo Group Munich.
    8. Chatterjee, Tonmoy & Gupta, Kausik, 2016. "Health Care Quality, Income Transfer and International Trade: A Theoretical Analysis," MPRA Paper 73128, University Library of Munich, Germany.
    9. Böhm, Sebastian & Grossmann, Volker & Strulik, Holger, 2017. "The Future of Human Health, Longevity, and Health Costs," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168288, Verein für Socialpolitik / German Economic Association.
    10. 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.
    11. Rajat Acharyya & Maria D.C. Garcia-Alonso, 2008. "Income-Based Price Subsidies, Parallel Imports and Markets Access to New Drugs for the Poor," Studies in Economics 0820, School of Economics, University of Kent.
    12. Gabaix, Xavier & Laibson, David & Li, Deyuan & Li, Hongyi & Resnick, Sidney & de Vries, Casper G., 2016. "The impact of competition on prices with numerous firms," Journal of Economic Theory, Elsevier, vol. 165(C), pages 1-24.
    13. Rajat Archaryya & María del Carmen García-Alonso, 2009. "Health Systems, Inequality and Incentives to Innovate," Studies in Economics 0902, School of Economics, University of Kent.
    14. Böhm, Sebastian & Grossmann, Volker & Strulik, Holger, 2017. "R&D-driven medical progess, health care costs, and the future of human longevity," Center for European, Governance and Economic Development Research Discussion Papers 325, University of Goettingen, Department of Economics.
    15. Lundin Douglas & Ramsberg Joakim, 2008. "Dynamic Cost-Effectiveness: A More Efficient Reimbursement Criterion," Forum for Health Economics & Policy, De Gruyter, vol. 11(2), pages 1-17, November.
    16. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484 National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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