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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.

Suggested Citation

  • Darius Lakdawalla & Neeraj Sood, 2007. "The Welfare Effects of Public Drug Insurance," NBER Working Papers 13501, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13501
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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. Boone, Jan, 2013. "Does the market choose optimal health insurance coverage?," CEPR Discussion Papers 9420, C.E.P.R. Discussion Papers.
    5. 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.
    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. Bhattacharya, Jay & Packalen, Mikko, 2012. "The other ex ante moral hazard in health," Journal of Health Economics, Elsevier, vol. 31(1), pages 135-146.
    8. 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.
    9. Lakdawalla, Darius & Sood, Neeraj, 2013. "Health insurance as a two-part pricing contract," Journal of Public Economics, Elsevier, vol. 102(C), pages 1-12.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. Jeffrey Clemens, 2012. "The Effect of U.S. Health Insurance Expansions on Medical Innovation," Discussion Papers 11-016, Stanford Institute for Economic Policy Research.
    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.

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    More about this item

    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

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