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Assessing Consumer Gains from a Drug Price Control Policy in the United States

Author

Listed:
  • Rexford E. Santerre

    () (Department of Finance and Center for Healthcare and Insurance Studies, University of Connecticut School of Business)

  • John A. Vernon

    () (Department of Finance and Center for Healthcare and Insurance Studies, University of Connecticut School of Business and National Bureau of Economic Research (NBER))

Abstract

We use national data from 1960 to 2000 to estimate the demand for pharmaceuticals in the United States. We then simulate consumer surplus gains from a hypothetical drug price control policy that would have limited drug price increases to the rate of inflation from 1981 to 2000. Using a range of values for the real interest rate, coinsurance rate, and own-price elasticity of demand, we find that the consumer surplus gains from this policy equal $472 billion by the end of 2000. According to a recent study, that same policy would have led to 198 fewer new drugs being brought to the U.S. market. Therefore, the average social opportunity cost per drug developed during this period was approximately $2.4 billion. Research on the value of pharmaceuticals suggests that the social benefits of a new drug are far greater than this estimate. Hence, drug price controls could do more harm than good.

Suggested Citation

  • Rexford E. Santerre & John A. Vernon, 2006. "Assessing Consumer Gains from a Drug Price Control Policy in the United States," Southern Economic Journal, Southern Economic Association, vol. 73(1), pages 233-245, July.
  • Handle: RePEc:sej:ancoec:v:73:1:y:2006:p:233-245
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    Cited by:

    1. Joseph Golec & John Vernon, 2010. "Financial Effects of Pharmaceutical Price Regulation on R&D Spending by EU versus US Firms," PharmacoEconomics, Springer, vol. 28(8), pages 615-628, August.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • K2 - Law and Economics - - Regulation and Business Law
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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