Friday, December 10, 2004
The government is trading your life away
[John A. Vernon, Rexford E. Santerre, and Carmelo Giaccotto, "Are Drug Price Controls Good for Your Health?," Medical Progress Report, No. 1, The Manhattan Institute, December 2004.]
New research from The Manhattan Institute indicates a direct correlation between greater government purchase of prescription drugs and lower investment in research and development. In other words, the government is trading the cures of tomorrow for lower prices now.
Collecting national data for the U.S. for 1960–2001 and using multiple regression analysis, we find that from 1992 to 2001 a 10 percent increase in the growth of government's share of total spending on pharmaceuticals was associated with a 6.7 percent annual reduction in the growth of pharmaceutical prices. Two new laws, OBRA of 1990 and the Veterans Act of 1992, aimed at controlling drug prices under public programs, account for much of this impact.
Using these regression results, we then simulate how the prices for medicines would have differed throughout the period from 1960 to 2001 in the absence of any government influence. The simulation implied that the ratio of the pharmaceutical price index to the general price index would have been 1.27 rather than 0.94 in 2001, suggesting that pharmaceutical prices would have been about 35 percent higher, on average, in the absence of this government influence.
Using the predicted trend in pharmaceutical prices without government influence and an established elasticity of R&D spending with respect to drug prices from prior research, we determined that the resulting government-induced loss of capitalized pharmaceutical R&D expenditures was $188 billion (in 2000 dollars) from 1960 to 2001. This "lost" R&D may be translated into human life years "lost"—literally, increased pain and suffering and shorter lives caused by the absence of new medicines and future research—by using results from recent econometric work on the productivity of pharmaceutical R&D in the U.S. over the same period. We conclude that the federal government's influence on real drug prices cost the U.S. economy approximately 140 million life years between 1960 and 2001.
[John A. Vernon, Rexford E. Santerre, and Carmelo Giaccotto, "Are Drug Price Controls Good for Your Health?," Medical Progress Report, No. 1, The Manhattan Institute, December 2004.]
New research from The Manhattan Institute indicates a direct correlation between greater government purchase of prescription drugs and lower investment in research and development. In other words, the government is trading the cures of tomorrow for lower prices now.
Collecting national data for the U.S. for 1960–2001 and using multiple regression analysis, we find that from 1992 to 2001 a 10 percent increase in the growth of government's share of total spending on pharmaceuticals was associated with a 6.7 percent annual reduction in the growth of pharmaceutical prices. Two new laws, OBRA of 1990 and the Veterans Act of 1992, aimed at controlling drug prices under public programs, account for much of this impact.
Using these regression results, we then simulate how the prices for medicines would have differed throughout the period from 1960 to 2001 in the absence of any government influence. The simulation implied that the ratio of the pharmaceutical price index to the general price index would have been 1.27 rather than 0.94 in 2001, suggesting that pharmaceutical prices would have been about 35 percent higher, on average, in the absence of this government influence.
Using the predicted trend in pharmaceutical prices without government influence and an established elasticity of R&D spending with respect to drug prices from prior research, we determined that the resulting government-induced loss of capitalized pharmaceutical R&D expenditures was $188 billion (in 2000 dollars) from 1960 to 2001. This "lost" R&D may be translated into human life years "lost"—literally, increased pain and suffering and shorter lives caused by the absence of new medicines and future research—by using results from recent econometric work on the productivity of pharmaceutical R&D in the U.S. over the same period. We conclude that the federal government's influence on real drug prices cost the U.S. economy approximately 140 million life years between 1960 and 2001.
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