The Effect of Price Regulation on Innovation in the Pharmaceutical Industry

Abstract

The empirical relationship between pharmaceutical industry revenues and pharmaceutical industry innova- tion is estimated, allowing for an exploration of the impact of the Medicaid rebate program, a form of price regulation. Using the empirical results, the opportunity cost of the Medicaid rebate program is found to be as high as four new drug approvals annually. Given the increased interest in a Medicare drug benefit, regu- lators should be aware of the hidden cost of price regulation for pharmaceuticals.