How does health policy and pricing affect investment in innovation? This is the research question investigated in Amy Finkelstein’s 2004 QJE paper on Static and Dynamic Effects of Health Policy. She examines three policy changes:
- 1991 CDC recommendation that all infants be vaccinated against Hepatitis B
- 1993 decision for Medicare to cover (without any copayments or deductibles) the cost of influenza vaccination for Medicare recipients.
- the introduction of the Vaccine Injury Compensation Fund (VICF) in 1986, indemnified manufacturers from lawsuits stemming from potentially adverse reactions to childhood vaccines against polio, diphtheria-tetanus (DT), measles mumps-rubella (MMR), and pertussis.
The effect of these policies on vaccine research were categorized into four streams of research: (i) basic research (which may result in a patent), (ii) preclinical trials (testing in animals), (iii) clinical trials (testing in humans), and (iv) FDA approval. Finkelstein looks at whether the adoption of one of the three policies listed above affected the number of new clinical trials controlling for year and disease specific effects. She compares “control” diseases unlikely to be affected by the policy changes with “treatment’ diseases where the policy changes are more likely to have a large effect.
Finkelstein finds large effects on clinical trial investment, but less investment in basic research or patents.
These estimates imply that a $1 increase in annual expected market revenue for vaccines against a particular disease stimulates an additional 6 cents in annual present discounted value investment in that vaccine…For most of the affected diseases, I find that the induced innovation is entirely socially wasteful business stealing, although the magnitude of the dynamic social costs is small. In one case, however, I estimate that the “dynamic” welfare benefits from the induced innovation are not only positive, but also larger than the “static” welfare benefits from the policy’s effect on vaccination with the preexisting technology. These findings underscore the inadequacy of the near-exclusive focus in economic evaluations of health policy on the policy’s “static” effects.
…in the case of the Flu vaccine, I estimate that the “dynamic” social welfare benefits from the induced innovation are not only positive, but also larger than the “static” social welfare benefits of the Flu
policy from increasing utilization of the existing vaccines
Finkelstein does mention that for other diseases, the dynamic welfare implications are less because they represent “business stealing”. However, to the extent that additional R&D produces alternative treatments, this could drive down prices of patented products which would be beneficial to society. Further, if vaccine efficacy varies by person of patients have different preferences over vaccines–e.g., if one vaccine is administered orally and another administered through an injection–then this “business stealing” concept obscures the value of having more choice and more competition in the vaccine market.
Nevertheless, this is an interesting paper and makes the important point also highlighted in Acemoglu and Linn that market size and profit potential drive R&D investments.
- Finkelstein, Amy. “Static and dynamic effects of health policy: Evidence from the vaccine industry.” QUARTERLY JOURNAL OF ECONOMICS-CAMBRIDGE MASSACHUSETTS- 119, no. 2 (2004): 527-564.