TY  - JOUR
AU  - Lakdawalla,Darius
AU  - Sood,Neeraj
TI  - The Welfare Effects of Public Drug Insurance
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13501
PY  - 2007
Y2  - October 2007
UR  - http://www.nber.org/papers/w13501
L1  - http://www.nber.org/papers/w13501.pdf
N1  - Author contact info:
Darius N. Lakdawalla
Schaeffer Center for Health Policy and Economics
University of Southern California
3335 S. Figueroa St, Unit A
Los Angeles, CA 90089-7273
Tel: 213/740-6012
E-Mail: dlakdawa@healthpolicy.usc.edu

Neeraj Sood
Schaeffer Center for Health Policy and Economics
3335 S. Figueroa Street, Unit A
Los Angeles, CA 90089-7273
Tel: 310/393-0411
Fax: 310/260-8156
E-Mail: nsood@healthpolicy.usc.edu
AB  - 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.
ER  -