Effects of innovation and insurance coverage on price elasticity of demand for prescription drugs: some empirical lessons in pharmacoeconomics.

AIM

Prescription drug prices in the United States are considered rather extreme. Americans spend over $460 billion on drugs annually, or almost 17 percent of total national healthcare spending. How innovation incentives and insurance coverage drive pricing, diffusion, and utilization of drugs, under conditions of risk and competition, are multi-dimensional issues in medical economics that remain under-explored in the current empirical literature. We seek to address these issues in reviewing relevant studies presented at the 2020 AEA-ASSA annual convention.

APPROACH

Drawn from the 2020 convention panel sessions devoted to health economics, empirical evidence was thematically analyzed for charted new research terrains and trajectories. Their theoretical and practical implications on efficiency, effectiveness, and value in drug production and consumption were then identified.

FINDINGS

With certain qualifications, evidence confirms price inelasticity of prescription drugs and medical treatments, along with substitution effects from high or continuously rising prices. While health insurance induces moral hazard, albeit on a larger scale than previously considered, losing dependent coverage can incentivize price-substitution to risky and illegal drugs, including those sold on the black market. At the firm level, drug patenting and exclusivity rights suggest that innovation incentives increase new or novel clinical trials and generic utilization to a considerable extent. But innovation can produce strong, offsetting effects. It can distort competition and cause (at times sharp) price increases from product-hopping, (compensatory) list pricing, industry mergers and acquisitions, and capture of positive spillovers by competitors, rather than by focal developers, in follow-on innovations. In fine, there remains room for opportunism among firms, particularly market incumbents, and many loopholes are unplugged by U.S. healthcare reform. These make drug utilization costly to the insured, and risky to those who are - or become - uninsured or underinsured for various reasons.

CONCLUSIONS

The fundamental disconnect between innovation cost and drug pricing demands public attention and policy intervention, which have proved largely elusive to date. Gaming the system in the name of scientific invention and discovery to reap additional benefits, at the expense of consumer health and income, brings to question the offsetting benefits of firm innovation. It also raises separate issues of fairness and equity. Innovation needs to be considered from the perspective of value lines and beyond conventional marketing incentives to drug utilization, with or without insurance coverage. Cost-effectiveness and cost-benefit analyses figure prominently under a value-based system of resource allocation, insurance, medical prescription, purchasing, and reimbursement.