The Welfare Effects of Public Drug Insurance

Darius Lakdawalla and Neeraj Sood

No 13501, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: H2 H51 I11 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-hea, nep-ias, nep-ipr and nep-pr~
Note: EH PE
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Citations: View citations in EconPapers (20)

Published as Lakdawalla, Darius & Sood, Neeraj, 2009. "Innovation and the welfare effects of public drug insurance," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 541-548, April.

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