Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development

Abstract

Recent evidence suggests that Medicare Part D increased prescription drug use among seniors, and increased pharmaceutical firms’ revenues from sales. Previous studies also indicate that increases in market size induce pharmaceutical innovation. This paper assesses the impact of the Medicare Part D legislation on pharmaceutical research and development (R&D), using time-series data on the number of drugs entering preclinical and clinical development by therapeutic class and phase. We find that the passage and implementation of Medicare Part D is associated with significant increases in pharmaceutical R&D for therapeutic classes with higher Medicare market share.

"Start-up costs, taxes and innovative entrepreneurship"

“…As we explained earlier, higher rates of corporate and personal income taxes can adversely affect the prize of innovation for entrepreneurs. This argument fits a more general notion in the innovation literature that firms' propensity to engage in innovation is responsive to changes in the expected profitability of their potential products (Gilbert, 2006;Blume-Kohout and Sood, 2013). While onerous taxation can lower the amount of the innovation prize, entrepreneurs tend to credit themselves for their successes (Cullen and Gordon, 2005;Parker, 2009).…”

“…Firms' (and individuals') allocation decisions are responsive to changes in the expected rewards of their efforts (Feldstein, 2002;Blume-Kohout and Sood, 2013). The costs imposed by government regulations influence the relative rewards of different business activities (Atkinson and Stiglitz, 1980;Pizer, 2002).…”

In the Shadow of a Giant: Medicare’s Influence on Private Physician Payments

“…Acemoglu and Linn (2004), Finkelstein (2004), Blume-Kohout and Sood (2013), Clemens (2013), and Budish et al (2015) show that innovation responds to potential market sizes.…”

“… 6 Acemoglu and Finkelstein (2008) and Clemens and Gottlieb (2014) study investment decisions, while Acemoglu and Linn (2004), Finkelstein (2004), Blume-Kohout and Sood (2013), Clemens (2013), and Budish, Roin, and Williams (2015) show that innovation responds to potential market sizes, which affect the return to practice more generally. The literature on short-run, intensive-margin supply includes, e.g., Jacobson et al (2010) and Clemens and Gottlieb (2014).…”

Tort Reform and Innovation

“…We extrapolate the time series to construct the data for the two missing years. 13 The coefficient on tort reform is stable, whereas the dummy on national standardization is negative, small…”