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Author: | Lakdawalla, D. Sood, N. |
Title: | Innovation and the welfare effects of public drug insurance |
Journal: | Journal of Public Economics
2009 : APR, VOL. 93:3-4, p. 541-548 |
Index terms: | public sector health insurance welfare models Europe USA innovation pharmaceutical industry |
Freeterms: | drugs |
Language: | eng |
Abstract: | Prescription drug insurance (herein as: d-ins.) achieves an elusive goal: lowering static deadweight loss, without reducing incentives for innovation. As a result, the public provision of d-ins. can be welfare-improving, even for risk-neutral and purely self-interested consumers. The design of insurers' cost-sharing schedules can either reinforce or mitigate this result. Schedules imposing higher consumer cost-sharing requirements on more expensive drugs help ensure that insurance subsidies translate into higher utilization, rather than pure increases in manufacturer profits. Furthermore, some degree of price-negotiation with manufacturers is likely to be welfare-improving, but the optimal degree depends on the size of such transactions costs and the social cost of weakening innovation incentives by lowering innovator profits. The results have practical implications for the evaluation of public drug insurance programs like the U.S. Medicaid and Medicare Part D programs and the European insurance schemes. |
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