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Innovation and the welfare effects of public drug insurance

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  • Lakdawalla, Darius
  • Sood, Neeraj

Abstract

Rewarding inventors with inefficient monopoly power has long been regarded as the price of encouraging innovation. Prescription drug insurance escapes that trade-off and achieves an elusive goal: lowering static deadweight loss, without reducing incentives for 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. The design of insurers' cost-sharing schedules can either reinforce or mitigate this result. Schedules that impose higher consumer cost-sharing requirements on more expensive drugs help ensure that insurance subsidies translate into higher utilization, rather than pure increases in manufacturer profits. Moreover, some degree of price-negotiation with manufacturers is likely to be welfare-improving, but the optimal degree depends on the size of such transactions costs, as well as the social cost of weakening innovation incentives by lowering innovator profits. These results have practical implications for the evaluation of public drug insurance programs like the US Medicaid and Medicare Part D programs, along with European insurance schemes.

Suggested Citation

  • 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:eee:pubeco:v:93:y:2009:i:3-4:p:541-548
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lakdawalla, Darius & Sood, Neeraj & Gu, Qian, 2013. "Pharmaceutical advertising and Medicare Part D," Journal of Health Economics, Elsevier, vol. 32(6), pages 1356-1367.
    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. Patricia Danzon & Adrian Towse & Jorge Mestre‐Ferrandiz, 2015. "Value‐Based Differential Pricing: Efficient Prices for Drugs in a Global Context," Health Economics, John Wiley & Sons, Ltd., vol. 24(3), pages 294-301, March.
    4. Hostenkamp, Gisela, 2013. "Do follow-on therapeutic substitutes induce price competition between hospital medicines? Evidence from the Danish hospital sector," Health Policy, Elsevier, vol. 111(1), pages 68-77.
    5. Liran Einav & Amy Finkelstein & Maria Polyakova, 2016. "Private Provision of Social Insurance: Drug-specific Price Elasticities and Cost Sharing in Medicare Part D," NBER Working Papers 22277, National Bureau of Economic Research, Inc.
    6. Jena, Anupam B. & Philipson, Tomas J., 2013. "Endogenous cost-effectiveness analysis and health care technology adoption," Journal of Health Economics, Elsevier, vol. 32(1), pages 172-180.
    7. Berndt Ernst R. & McGuire Thomas & Newhouse Joseph P., 2011. "A Primer on the Economics of Prescription Pharmaceutical Pricing in Health Insurance Markets," Forum for Health Economics & Policy, De Gruyter, vol. 14(2), pages 1-30, November.
    8. Paul Grootendorst, 2012. "Prescription Drug Insurance and Reimbursement," Chapters,in: The Elgar Companion to Health Economics, Second Edition, chapter 11 Edward Elgar Publishing.
    9. 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.
    10. repec:bla:jpbect:v:19:y:2017:i:1:p:121-141 is not listed on IDEAS
    11. Lakdawalla, Darius & Sood, Neeraj, 2013. "Health insurance as a two-part pricing contract," Journal of Public Economics, Elsevier, vol. 102(C), pages 1-12.
    12. Jeffrey Clemens, 2012. "The Effect of U.S. Health Insurance Expansions on Medical Innovation," Discussion Papers 11-016, Stanford Institute for Economic Policy Research.
    13. Rosella Levaggi & Paolo Pertile, 2016. "Pricing policies when patients are heterogeneous: a welfare analysis," Working Papers 17/2016, University of Verona, Department of Economics.
    14. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2017. "The Dynamics of Pharmaceutical Regulation and R&D Investments," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 121-141, February.
    15. Glazer Jacob & Huskamp Haiden A. & McGuire Thomas G., 2012. "A Prescription for Drug Formulary Evaluation: An Application of Price Indexes," Forum for Health Economics & Policy, De Gruyter, vol. 15(2), pages 1-26, March.
    16. Thomas Buchmueller & John C. Ham & Lara D. Shore-Sheppard, 2015. "The Medicaid Program," NBER Chapters,in: Economics of Means-Tested Transfer Programs in the United States, volume 1, pages 21-136 National Bureau of Economic Research, Inc.
    17. Glazer, Jacob & McGuire, Thomas G., 2012. "A welfare measure of “offset effects” in health insurance," Journal of Public Economics, Elsevier, vol. 96(5), pages 520-523.

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