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Assessing Consumer Gains from a Drug Price Control Policy in the United States

July 1, 2006
By Rexford E. Santerre and John A. Vernon

This paper uses national consumer data from 1960 to 2000 to estimate the effects of a federal drug price control policy.

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This paper, written by University of Connecticut professor of finance and healthcare management Rexford Santerre and UNC Gillings School of Global Public Health professor of health policy and management John Vernon, uses national consumer data from 1960 to 2000 to estimate the effects of a federal drug price control policy.

Limiting drug price changes to match changes in monetary inflation would have resulted in the creation of 198 fewer new drugs over 60 years, as well as an accompanying quantitative reduction in Americans’ quality of life. 

It’s difficult to quantify the monetary value of life, Santerre and Vernon write, but the potential opportunity cost drug price controls incur can be estimated.

“Of course, both higher and lower estimates of the value of a life year exist,” Santerre and Vernon wrote. “This simple first approximation places the cost of our hypothetical price control policy at between $19.7 and $21.8 trillion in terms of value of lives lost or at $23 billion worth of lives lost per new drug. This range of figures is over 28 times larger than our estimated range for the consumer surplus gains produced by this drug price control policy ($176-$767 billion). This leads to the conclusion that a price control regime of the type described here would have done much more harm than good from a social welfare perspective.”

Developing more drugs to save lives helps society more than keeping drug prices artificially low, Santerre and Vernon write.

“For the nation as a whole, and using the most likely values, we estimate that the future value of the consumer surplus from the assumed price control regime would equal about $221 billion in 2000,” Santerre and Vernon wrote. “On a per drug basis, we estimate that the consumer opportunity cost of not imposing this price control policy was approximately $1.1 billion. However, when compared with the estimated benefits of the additional pharmaceutical R&D that was undertaken because these hypothetical price controls were not implemented, these costs appear to be very small. Given our results, and those reported in earlier research, society might be better off discovering more efficient ways than price controls to improve access to existing drugs.”