Drug Research and Price Controls: What Would Happen If the United States Adopted Other Countries' Drug Price Regulations? (Health & Medicine)

By Vernon, John A. | Regulation, Winter 2002 | Go to article overview

Drug Research and Price Controls: What Would Happen If the United States Adopted Other Countries' Drug Price Regulations? (Health & Medicine)


Vernon, John A., Regulation


IN THE UNITED STATES, PRESCRIPTION DRUG prices are largely unregulated. That differs from most other countries, where drug prices are regulated either directly through price controls (e.g., France and Italy), indirectly through limits on reimbursement under social insurance schemes (e.g., Germany and Japan), or indirectly through profit controls (e.g., the United Kingdom). For a detailed listing of those controls, see Table 1.

That striking difference has given rise to one of the most contentious public policy issues in recent years: whether or not the U.S. government should join most of the rest of the world in regulating drug prices. In general, supporters of pharmaceutical price controls argue that drug prices in the United States are excessive and that price controls would ensure affordable health care for all Americans. Opponents of price regulation argue that price controls would significantly diminish incentives to invest in pharmaceutical research and development, which would harm medical advances in the future. Are those opponents of regulation correct?

PHARMACEUTICAL R&D INVESTMENT

Basic economic theory predicts that firms invest in capital up to the point where the expected marginal efficiency of investment (MEI) is equal to the marginal cost of capital (MCC). That equilibrium may be thought of in the classic way as the intersection of a demand (for investment) and supply curve (investment funds). Specifically, the firm's MEI schedule is derived by arranging potential investment projects in a decreasing order with respect to each project's risk-adjusted expected rate of return. Firms will undertake the most profitable projects first and will continue to undertake additional projects so long as the expected rate of return from the next project exceeds the firm's marginal cost of capital. The classic supply and demand framework for capital investment may be applied directly to investment in pharmaceutical research and development.

In a neoclassical world, with perfect information and well-functioning capital markets, the MCC schedule would simply be constant at the real market rate of interest. The firm will be indifferent about the source of investment finance. However, recent work -- both theoretical and empirical -- has demonstrated that the source of finance does matter. Cash flows, because they have a lower cost of capital relative to external debt and equity, exert a positive influence on firm investment spending. That has been particularly true for empirical studies of pharmaceutical R&D investment.

The effect of price controls and other equivalent regulations is to reduce the expected return on investment in R&D (and therefore the demand for R&D). Thus, for firms whose pharmaceutical sales come primarily from markets outside the United States, the expected returns to R&D are likely to be lower (all things considered) than the expected returns to R&D for firms whose market is predominantly the U.S. pharmaceutical market.

Data and model design To begin my research, I collected data for the world's 20 largest pharmaceutical firms (as ranked by 1999 world pharmaceutical sales) for the period from 1988- 1999 through IMS America, Standard and Poor's Compustat files, and Scrip Company League Tables. (I ignored firms that ranked between 20 and 50 because many of those are generic drug manufacturers without the same emphasis on R&D as "brand name" drug makers.) Of the top 20 firms for which IMS data were collected, 15 also had data available from both Compustat files and Scrip. Those 15 firms became the sample for my study.

Ranked in order of sales, those firms are: Pfizer, Merck & Co., AstraZeneca, Aventis, Bristol-Myers Squibb, Glaxo Well-come, Pharmacia, Roche, Johnson & Johnson, American Home Products, Eli Lilly, SmithKline Beecham, Abbott Laboratories, Bayer, and Amgen.

I then estimated the following regression model of the determinants of R&D investment intensity:

[RDS. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Drug Research and Price Controls: What Would Happen If the United States Adopted Other Countries' Drug Price Regulations? (Health & Medicine)
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.