Pharmaceutical price controls and minimum efficacy regulation: evidence from the United States and Italy

Abstract

Objective: This article examines the relationship between drug price and drug quality and how it varies across two of the most common regulatory regimes in the pharmaceutical market: minimum efficacy standards (MES) and a mix of MES and price control mechanisms (MES + PC).

Data sources: Our primary data source is the Tufts-New England Medical Center-Cost Effectiveness Analysis Registry which have been merged with price data taken from MEPS (for the United States) and AIFA (for Italy).

Study design: Through a simple model of adverse selection we model the interaction between firms, heterogeneous buyers, and the regulator.

Principal findings: The theoretical analysis provides two results. First, an MES regime provides greater incentives to produce high-quality drugs. Second, an MES + PC mix reduces the difference in price between the highest and lowest quality drugs on the market.

Conclusion: The empirical analysis based on United States and Italian data corroborates these results.

Figure 1

Densities Plots of Price Distributions: Tufts Sample

Figure 2

Densities Plots of Price Distributions: MEPS-AIFA Sample