The welfare effects of public drug insurance / Darius Lakdawalla, Neeraj Sood

Author:: Lakdawalla, Darius
Published:: Cambridge, Mass. : National Bureau of Economic Research, [2007]
Copyright Date:: ©2007
Physical Description:: 35, 4, 2 pages : illustrations ; 22 cm.
Additional Creators:: Sood, Neeraj
National Bureau of Economic Research
Access Online:: www.nber.org

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NBER working paper series ; working paper no. 13501

Summary:

Rewarding inventors with inefficient monopoly power has long been regarded as the price of encouraging innovation. Public prescription drug insurance escapes that trade-off and achieves an elusive goal: lowering static deadweight loss, while simultaneously encouraging dynamic investments in innovation. As a result of this feature, the public provision of drug insurance can be welfare-improving, even for risk-neutral and purely self-interested consumers. In spite of its relatively low benefit levels, the Medicare Part D benefit generate $3.5 billion of annual static deadweight loss reduction, and at least $2.8 billion of annual value from extra innovation. These two components alone cover 87% of the social cost of publicly financing the benefit. The analysis of static and dynamic efficiency also has implications for policies complementary to a drug benefit: in the context of public monopsony power, some degree of price-negotiation by the government is always strictly welfare-improving, but this should often be coupled with extensions in patent length.

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"October 2007."

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