Abstract
Background: Because pharmaceutical price controls fall outside the domain of historical experience in the US, standard retrospective statistical analyses of firm- and/or industry-level data are not appropriate for studying the long-run impact of price controls on pharmaceutical innovation. Simulation modeling, however, can be used to address this issue.
Objective: To examine, through simulation experiments, the long-run impact of several hypothetical US price-control policies on pharmaceutical innovation; a computer simulation model of pharmaceutical competition and innovation was developed.
Study design: Using the most current economic data available, a hypothetical pharmaceutical industry was created. This industry was formulated to reflect many of the relevant aspects of innovation and competition found in today’s global pharmaceutical industry. This industry was then simulated over a 50-year time horizon, under several different price-control scenarios, in order to better understand the quantitative implications price regulation may have on pharmaceutical innovation.
Main outcome measures and results: The primary outcome of interest in this study was pharmaceutical innovative output. Because pharmaceutical firms finance their research and development (R&D) with internally generated funds (after-tax sales revenues), price controls in the model have the effect of reducing R&D investment, and therefore innovation. This was measured by two variables: annual innovative productivity (the annual number of drugs produced by the industry) and cumulative innovative productivity (the total number of drugs produced by the industry over the 50-year time horizon studied). Under a system of public-utility type, cost-based price controls, annual innovative productivity in the model fell by between 67 and 73% relative to baseline (the model without price controls); cumulative innovative output fell by between 30 and 37%. Simulation experiments were also run assuming less extreme forms of pharmaceutical price regulation. These experiments produced smaller reductions in innovative output: annual and cumulative innovative productivity fell by between 21 and 49% and 6 and 24%, respectively.
Conclusion: The regulation of pharmaceutical prices in the US could have a precipitous effect on pharmaceutical innovation in the long run. Careful consideration must be given to any new policy that advocates imposing controls on pharmaceutical prices. Long run costs — in terms of forgone pharmaceutical innovation — must be weighed against any short-term benefits price regulation may impart.
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Vernon, J.A. Simulating the Impact of Price Regulation on Pharmaceutical Innovation. Pharm Dev Regul 1, 55–65 (2003). https://doi.org/10.1007/BF03257365
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DOI: https://doi.org/10.1007/BF03257365