An Ounce of Prevention or a Pound of Cure? Short- and Long-Run Effects of Pharmaceutical Patents on U.S. Health Care Expenditures

Abstract:     
This study examines the relationship between pharmaceutical R&D and health care expenditures, distinguishing between the short- and long-run impacts. To measure these relationships quantitatively, we focus on patents as a key factor driving the costs of pharmaceuticals, and develop a structured vector autoregressive (SVAR) model to measure the social rate of return to pharmaceutical research as protected by patents. We conclude with unambiguous results that pharmaceutical patents are not correlated with higher short-run prices in any measure of medical costs. They are associated with higher long-run prices in pharmaceuticals themselves, but with lower long-run prices in the aggregate medical sector which includes pharmaceuticals as a component part. Further, the TRIPS Agreement and Hatch-Waxman Act to enable generic competition have both been demonstrably effective at lowering prices across the spectrum of medical sector prices. We conclude that pharmaceutical patents may be economically medicinal themselves, acting as the 'ounce of prevention' that saves a 'pound of cure', the cure which would come in the form of even higher costs elsewhere in the medical sector.

Keywords: health, inflation, price, pharma, patent, VAR, structured vector autoregression, TRIPS, Hatch-Waxman, cost, IP, hospital, drug

JEL Classifications: H51, I1, I10, I11, I18, O32, O34, O38, E31, C32

Working Paper Series