The Long-Term Impact of Price Controls in Medicare Part D

Moreno Gigi, Emma van Eijndhoven, Benner Jennifer and Sullivan Jeffrey ()
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Moreno Gigi: Precision Health Economics, Los Angeles, CA, USA
Emma van Eijndhoven: Precision Health Economics, Los Angeles, CA, USA
Benner Jennifer: Precision Health Economics, Los Angeles, CA, USA
Sullivan Jeffrey: Precision Health Economics, Los Angeles, CA, USA

Forum for Health Economics & Policy, 2017, vol. 20, issue 2, 56

Abstract: 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.

Keywords: innovation; Medicare; prescription drugs; price controls; simulation (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1515/fhep-2016-0011

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