Hitting the Roof: Clinton's Medicare Prescription Drug Proposal and its Effect on R&D Incentives for Pharmaceuticals

Abstract

President Clinton's proposed prescription drug benefit for Medicare is examined with a view toward its effects on research and development incentives in the pharmaceutical industry. A simulation model based on Grabowski and Vernon's analysis of the 1984 Patent Term Restoration Act is developed. The model provides parameter-based estimates for patent exten­sions that might compensate pharmaceutical firms for various levels of price cuts. It also shows that any political tradeoff that tries to maintain R&D incentives by exchanging price cuts for patent extensions will run up against a fundamental limit. Policy considerations for alternate deals are discussed.