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

We use national data from 1960 to 2000 to estimate the demand for pharmaceuticals in the United States. We then simulate consumer surplus gains from a hypothetical drug price control policy that would have limited drug price increases to the rate of inflation from 1981 to 2000. Using a range of values for the real interest rate, coinsurance rate, and own-price elasticity of demand, we find that the consumer surplus gains from this policy equal $472 billion by the end of 2000. According to a recent study, that same policy would have led to 198 fewer new drugs being brought to the U.S. market. Therefore, the average social opportunity cost per drug developed during this period was approximately $2.4 billion. Research on the value of pharmaceuticals suggests that the social benefits of a new drug are far greater than this estimate. Hence, drug price controls could do more harm than good.