Which Markets (Don't) Drive Pharmaceutical Innovation? Evidence From U.S. Medicaid Expansions (WP-21-26)
Craig Garthwaite, Rebecca Sachs, and Ariel Dora Stern
Pharmaceutical innovation policy involves managing a tradeoff between high prices for new products in the short-term and stronger incentives to develop products for the future. Prior research has documented a causal relationship between market size and pharmaceutical research and development (R&D) activities. The existing literature, however, provides no evidence of how this relationship varies across markets. The researchers investigate whether recent expansions in state Medicaid programs caused an increase in R&D. They find no evidence of a response, potentially a result of Medicaid’s low reimbursement for pharmaceuticals, suggesting low(er) price markets may have different dynamics with respect to innovation policy.