Monday, February 06, 2017

Price controls can kill

Here is the abstract from a  paper, "The Long-Term Impact of Price Controls in Medicare Part D", by Moreno, Eijndhoven, Benner, and Sullivan.

Whether or not the analysis is accurate, the fact is that there is a tradeoff between drug price controls and the rate of drug innovation.  There is also a tradeoff between the latter and the lifespan.  Therefore, a tradeoff is implied between the rate of drug innovation and lifespan.  This tradeoff is almost always ignored in what you hear from the media and politicians.



Price controls for prescription drugs are once again at the forefront of policy discussions in the United States. Much of the focus has been on the potential short-term savings – in terms of lower spending – although evidence suggests price controls can dampen innovation and adversely affect long-term population health. This paper applies the Health Economics Medical Innovation Simulation, a microsimulation of older Americans, to estimate the long-term impacts of government price setting in Medicare Part D, using pricing in the Federal Veterans Health Administration program as a proxy. We find that VA-style pricing policies would save between $0.1 trillion and $0.3 trillion (US$2015) in lifetime drug spending for people born in 1949–2005. However, such savings come with social costs. After accounting for innovation spillovers, we find that price setting in Part D reduces the number of new drug introductions by as much as 25% relative to the status quo. As a result, life expectancy for the cohort born in 1991–1995 is reduced by almost 2 years relative to the status quo. Overall, we find that price controls would reduce lifetime welfare by $5.7 to $13.3 trillion (US$2015) for the US population born in 1949–2005.

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