Evidence Doesn’t Suggest Cost-Shifting Between Public and Private Prescription Drug Markets

February 18, 2022

Recent pushes for drug pricing reforms have reignited worries that such a move would drive prescription prices up in the private sector to make up for revenue losses from Medicare. However, recent studies have not observed this trend. Instead, economic analysis suggests that public and private drug prices rise and fall in tandem.

According to a guest post on The Incidental Economist, “Proponents of this theory implicitly argue that there are features of the drug market that make this kind of compensatory behavior more likely. In particular, they emphasize that drug makers have both intellectual property protection over their products and often face relatively inelastic demand, conferring significant pricing power. In addition, they often point to an empirical reality of drug markets—that the list and net prices of brand drugs increase after a product has been launched—as evidence of unconstrained pricing power.”

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(Source: The Incidental Economist, February 17th, 2022)

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