U.S. pharmaceutical policy in a global marketplace

Health Affairs

Volumn 28, Issue 1, 2009, Pages

  Lakdawalla, Darius N ^a   Goldman, Dana P ^d   Michaud, Pierre Carl ^b,d   Sood, Neeraj ^d   Lempert, Robert ^c,d   Cong, Ze ^d   De Vries, Han ^a   Gutierrez, Italo ^e  

^a RAND CORPORATION   (United States)

^b Economics and Statistics ^*

^c Technology and Applied Sciences   (India)

^d RAND   (United States)

^e UNIVERSITY OF MICHIGAN   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

ARTICLE; COST CONTROL; DRUG INDUSTRY; HEALTH INSURANCE; MORBIDITY; MORTALITY; PRESCRIPTION; STATISTICAL SIGNIFICANCE; UNITED STATES; WELFARE;

COMMERCE; COST SHARING; EUROPE; HUMANS; INTERNATIONALITY; LONGEVITY; MIDDLE AGED; PHARMACEUTICAL SERVICES; POLICY MAKING; UNITED STATES;

EID: 59449084394     PISSN: 02782715     EISSN: 02782715     Source Type: Journal    
DOI: 10.1377/hlthaff.28.1.w138     Document Type: Article

References (40)

1. P.M. Danzon and M.F. Furukawa, "Prices and Availability of Biopharmaceuticals: An International Comparison," Health Affairs 25, no. 5 (2006): 1353-1362.
2. A. Finkelstein, "Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry," Quarterly Journal of Economics 119, no. 2 (2004): 527-564;
3. W. Yin, "Three Essays on the Economics of Health and Development" (Ph.D. thesis, Princeton University, 2005);
4. and P.M. Danzon, Y.R. Wang, and L. Wang, "The Impact of Price Regulation on the Launch Delay of New Drugs - Evidence from Twenty-five Major Markets in the 1990s," Health Economics 14, no. 3 (2005): 269-292.
5. N. Sood et al., "The Effect of Regulation on Pharmaceutical Revenues: Experience in Nineteen Countries, Health Affairs 28, no. 1 (2009): w125-w137 (published online 16 December 2008; 10.1377/hlthaff.28.1.w125) .
6. F.R. Lichtenberg and S.X. Sun, "The Impact of Medicare Part D on Prescription Drug Use by the Elderly," Health Affairs 26, no. 6 (2007): 1735-1744.
7. Ibid.; and W. Yin et al., "The Effect of the Medicare Part D Prescription Benefit on Drug Utilization and Expenditures," Annals of Internal Medicine 148, no. 3 (2008): 169-177.
8. M. Duggan and F. Scott Morton, "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization," NBER Working Paper no. 13917 (Cambridge, Mass.: National Bureau of Economic Research, 2008);
9. and Lichtenberg and Sun, "The Impact of Medicare Part D."
10. D.P. Goldman et al., "Consequences of Health Trends and Medical Innovation for the Future Elderly," Health Affairs 24 (2005): w5-r5-w5-r17;
11. and D. Goldman et al., Health Status and Medical Treatment of the Future Elderly: Final Report (Santa Monica, Calif.: RAND, 2004), TR-169.
12. This figure is based on the authors' calculation using data from the 2005 Medical Expenditure Panel Survey (MEPS).
13. The Technical Appendix is online at http://content.healthaffairs.org/cgi/ content/full/hlthaff.28.1.w138/DC2.
14. The United Kingdom is not included in SHARE.
15. This excludes vaccines and biologics.
16. Because of the time range of the INGENIX data set, the list was limited to drugs approved by the FDA from 1995 to 2002. Using alternative time frames increased the estimated value of innovation.
17. We were interested in ranking drugs by total lifetime sales, but this was unobserved. Fortunately, as shown in Technical Appendix C (Note 9), the pairwise correlations between ranks calculated using the first, second, third, or fourth full year after launch are typically above 0.9, and often above 0.95.
18. We deflated expenditures using the overall Consumer Price Index (CPI).
19. See the online Technical Appendix, as in Note 9.
20. D. Acemoglu and J. Linn, "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," Quarterly Journal of Economics 119, no. 3 (2004): 1049-1090.
21. They show that their results are largely unchanged if they focus entirely upon demographic changes resulting from fertility trends, rather than mortality trends.
22. For the cost of an NME, see J.A. DiMasi, R.W. Hansen, and H.G. Grabowski, "The Price of Innovation: New Estimates of Drug Development Costs," Journal of Health Economics 22, no. 2 (2003): 151-185.
23. Aswath Damodaran estimates the cost of capital in the pharmaceutical industry to be just under 12 percent. See A. Damodaran, "Return on Capital (ROC), Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurements and Implications," New York University Working Paper (New York: New York University, July 2007). Since Acemoglu and Linn include new formulations as well as NMEs, the average cost of development might be lower than $800 million and the estimated return higher.
24. F.M. Scherer, "The Link between Gross Profitability and Pharmaceutical R&D Spending," Health Affairs 20, no. 5 (2001): 216-220.
25. Exchange-rate fluctuations during 2000-2007 had only a 5-7 percent effect on our cost estimates.
26. In practice, the deadweight costs figure has little impact, since direct pharmaceutical spending represents a very small fraction of a policy's net present value. For the estimate of thirty cents for every dollar spent, see D. Jorgenson and K.Y. Yun, Investment, Volume 3, Lifting the Burden: Tax Reform, the Cost of Capital, and U.S. Economic Growth (Cambridge, Mass.: MIT Press, 2001).
27. This approach presumes that medical spending and drug spending represent true social costs of production, and thus abstracts from profits that may accrue to providers or pharmaceutical firms. As a result,we likely understate the net present value of policies that increase firms' or providers' profits.
28. R.A. Hirth et al., "Willingness to Pay for a Quality-Adjusted Life Year: In Search of a Standard," Medical Decision Making 20, no. 3 (2000): 332-342.
29. W.K. Viscusi and J.E. Aldy, "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," Journal of Risk and Uncertainty 27, no. 1 (2003): 5-76.
30. J.J. Siegel, "The Real Rate of Interest from 1800-1990: A Study of the U.S. and the U.K," Journal of Monetary Economics 29, no. 2 (1992): 227-252.
31. See the online Technical Appendix, as in Note 9.
32. Results are similar for the U.S. net present value and European net present value.
33. See the online Technical Appendix, as in Note 9.
34. Acemoglu and Linn, "Market Size in Innovation."
35. Finkelstein, "Static and Dynamic Effects"; Yin, "Three Essays"; and Danzon et al., "The Impact."
36. J. Bhattacharya and D.N. Lakdawalla, "Does Medicare Benefit the Poor?" Journal of Public Economics 90, nos. 1-2 (2006): 277-292.
37. D.M. Cutler, "The Lifetime Costs and Benefits of Medical Technology," NBER Working Paper no. 13478 (Cambridge, Mass: NBER, October 2007).
38. A. Peeters et al., "A Cardiovascular Life History: A Life Course Analysis of the Original Framingham Heart Study Cohort," European Heart Journal 23, no. 6 (2002): 458-466.
39. J.S. Skinner, D.O. Staiger, and E.S. Fisher, "Is Technological Change in Medicine Always Worth It? The Case of Acute Myocardial Infarction," Health Affairs 25 (2006): w34-w47 (published online 7 February 2006; 10.1377/hlthaff.25.w34).
40. F.R. Lichtenberg, "The Impact of New Drugs on U.S. Longevity and Medical Expenditure, 1990-2003: Evidence from Longitudinal, Disease-Level Data," American Economic Review 97, no. 2 (2007): 438-443.