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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.

Craig Garthwaite, Professor of Strategy, Herman Smith Research Professor in Hospital and Health Services Management, and IPR Associate, Northwestern University

Rebecca Sachs, Analyst, Health Market Studies, Congressional Budget Office

Ariel Dora Stern, Poronui Associate Professor of Business Administration, Harvard Business School

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