Medical Progress Report No. 1  December 2004 Are Drug Price Controls Good for Your Health? About the Authors John A. Vernon is an assistant professor of finance, insurance and risk management and healthcare management in the Department of Finance in the School of Business at the University of Connecticut. He teaches courses in corporate finance, economics, and healthcare management. John holds a Ph.D. in Management Science from the Wharton School of Business at the University of Pennsylvania and a Ph.D. in economics (concentration finance) from the City University of London.  A Duke University graduate, he also holds a masters degree in economics and statistics from North Carolina State University. John’s research focuses on the interface between regulation and pharmaceutical innovation, and, specifically, how the former affects the latter. He has testified before the U.S. Senate about his research, which has been published in, among other places, AEI-Brookings, Applied Economics Letters, Health Economics, The Journal of Law and Economics, The Journal of Law and Public Policy, The National Law Journal, Pharmaceutical Development and Regulation, and Regulation. Rexford E. Santerre is a Professor of Finance & Healthcare Management in the School of Business at the University of Connecticut. He received his Ph.D. in economics from the University of Connecticut in 1983 and is the coauthor of Health Economics: Theories, Insights, and Industry Studies, now in its third edition with Thomson/SouthWestern Publishers. He has written numerous articles for various general and specialty academic journals including the American Journal of Public Health, Applied Health Economics and Health Policy, Economic Inquiry, Health Care Management Review, Health Economics, International Journal of Health Care Finance and Economics, Journal of Law and Economics, Medical Care Research and Review, National Tax Journal, Public Choice, Southern Economic Journal, and The Review of Economics and Statistics. Carmelo Giaccotto is a Professor of Finance and a research fellow with the Center for Healthcare and Insurance Studies in the School of Business at the University of Connecticut. He received his Ph.D. in financial economics from the University of Kentucky in 1978. His research interests are in the area of Applied Econometrics, Health Care Issues, and Asset Pricing. He has written a textbook: Options and Futures: Concepts, Strategies, and Applications, and has published in diverse journals including: Journal of Finance, Journal of Econometrics, Journal of the American Statistical Association, Real Estate Economics, Journal of Urban Economics, and The Journal of Law and Economics.

EMAIL THIS | PRINTER FRIENDLY MPR 01 PDF (92 kb) WHAT THE PRESS SAID: Rx Price Controls Would Be Disastrous For Innovation, Study Says FDAnews.com, 12-15-04 Price Controls on Medicare-Covered Drugs Would Mean Less Innovation, Report Finds BNA, 12-9-04 Report Warns of Drug Price Controls Washington Times, 12-8-04 SUMMARY: Critics of the new Medicare drug benefit have called for the government to use its increased purchasing power to drive down drug prices. This study examines the effects of government pressure on pharmaceutical prices and R&D from 1960-2001. During that time, it finds that the government induced a loss of capitalized pharmaceutical R&D expenditures of $188 billion, resulting in 140 million lost life years due to the absence of new medicines. Applying this same analysis to the future, it finds that if government tries to use its new buying power to reduce drug prices R&D spending will drop by nearly 40%, resulting in a loss of 277 million life years. Consequently, policymakers should consider the trade-offs between lower drug prices now and the future health benefits of increased R&D spending. TABLE OF CONTENTS: EXECUTIVE SUMMARY BACKGROUND AND PURPOSE OF STUDY The MMA and the Noninterference Clause The Original Medicare Act and the Noninterference Clause Drug Price Controls and Innovation Purpose of This Study U.S. GOVERNMENT’S HISTORICAL INFLUENCE ON PHARMACEUTICAL PRICING Mechanisms of Government Influence Impact of Government Influence on Drug Prices, 1960 to 2001 Simulated Real Drug Prices with and without Government Influence, 1960 to 2001 Figure 1: Simulated Impact of Government Influence on Real Drug Prices GOVERNMENT INFLUENCE ON PHARMACEUTICAL R&D AND LIFE YEARS LOST Figure 2: Estimates of Lost R&D Because of Government Influence on Drug Prices Figure 3: Effect of Lost Life Years on U.S. Economy The Potential Future Costs of the MMA Figure 4: 2004 Estimated Present Value Cost of the MMA’s Negative Impact on Pharmaceutical Innovation CONCLUSIONS REFERENCES APPENDIX: MULTIPLE REGRESSION FINDINGS ABOUT THE AUTHORS ENDNOTES