MPT WWW
Selected research from leading health care experts whose findings have a direct bearing on public policies effecting medical progress. Research is chosen based on its quality and relevance by the Medical Progress Today editorial staff.

Selected Research

Research and Development in the Pharmaceutical Industry
Congressional Budget Office, 10-13-06

This CBO paper is an interesting addition to the existing literature on pharmaceutical industry investment and productivity. However, it also points out that the U.S.'s heavy reliance on third–party health insurance may encourage consumers to overspend on some kinds of health care, including pharmaceuticals.

High prices on new drugs encourage continued innovation. But because health insurance (private plans as well as Medicaid and Medicare) keeps consumers from bearing the full weight of those prices, the demand for new drugs is higher than it otherwise would be at any given price.

That effect is magnified because employment–based health insurance benefits are not subject to income or payroll taxes, which reduces their cost to consumers. As a result, more people have health insurance, and many have higher levels of coverage, than would be the case otherwise. The effect of health insurance on drug companies' revenues—combined with strong patent protection that helps firms maintain higher prices—may sometimes create incentives to invest too much in R&D (from the standpoint of the amount of investment that is optimal for society).

The role of health insurance can be tempered in several ways, however. Insurers and other large buyers of drugs may be able to exercise more power to negotiate lower prices, and insurers can give patients and doctors stronger incentives to consider price differences between drugs. The more accurately a drug's price reflects its value to consumers, the more effective the market system will be at directing R&D investment toward socially valuable new drugs. However, prices can only serve that directing role to the extent that good information exists about the comparative qualities of different drugs and that consumers and health care providers use that information.



Project FDA.
  
home   spotlight   commentary   research   events   news   about   contact   links   archives
Copyright Manhattan Institute for Policy Research
52 Vanderbilt Avenue
New York, NY 10017
(212) 599-7000
mpt@manhattan-institute.org