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

22 Pages Posted: 9 Apr 2009 Last revised: 19 Sep 2014

Hilary S. Johnson

Colorado College - Department of Economics and Business

Daniel K. N. Johnson

Colorado College - Department of Economics and Business

Date Written: April 7, 2009

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

Suggested Citation

Johnson, Hilary S. and Johnson, Daniel K. N., An Ounce of Prevention or a Pound of Cure? Short- and Long-Run Effects of Pharmaceutical Patents on U.S. Health Care Expenditures (April 7, 2009). Available at SSRN: https://ssrn.com/abstract=1374631 or http://dx.doi.org/10.2139/ssrn.1374631

Hilary S. Johnson

Colorado College - Department of Economics and Business ( email )

14 E Cache La Poudre Street
Colorado Springs, CO 80903
United States

Daniel Kent Neil Johnson (Contact Author)

Colorado College - Department of Economics and Business ( email )

14 E Cache La Poudre Street
Colorado Springs, CO 80903
United States
719-389-6654 (Phone)
719-389-6927 (Fax)

HOME PAGE: http://faculty1.coloradocollege.edu/~djohnson

Paper statistics

Downloads
116
Rank
197,801
Abstract Views
869