25 Regulation 22 (2002-2003)
Drug Research and Price Controls

handle is hein.journals/rcatorbg25 and id is 248 raw text is: What would happen if the United States adopted
other countries' drug price regulations?
Drug Research and
Price Controls
BY JOHN A. VERNON
University of Pennsylvania
N THE UNITED STATES, PRESCRIPTION DRUG
prices are largely unregulated. That differs from most
other countries, where drug prices are regulated either
directly through price controls (e.g., France and Italy),
indirectly through limits on reimbursement under
social insurance schemes (e.g., Germany and Japan)
or indirectly through profit controls (e.g., the United
Kingdom). For a detailed listing of those controls, see Table 1.
That striking difference has given rise to one of the most
contentious public policy issues in recent years: whether or not
the U.S. government should join most of the rest of the world
in regulating drug prices. In general, supporters of pharma-
ceutical price controls argue that drug prices in the United
States are excessive and that price controls would ensure afford-
able health care for all Americans. Opponents of price regu-
lation argue that price controls would significantly diminish
incentives to invest in pharmaceutical research and develop-
ment, which would harm medical advances in the future. Are
those opponents of regulation correct?
PHARMACEUTICAL R&D INVESTMENT
Basic economic theory predicts that firms invest in capital up
to the point where the expected marginal efficiency of invest-
ment (MEI) is equal to the marginal cost of capital (MCC). That
equilibrium may be thought of in the classic way as the inter-
section of a demand (for investment) and supply curve (invest-
ment funds). Specifically, the firm's MEI schedule is derived by
arranging potential investment projects in a decreasing order
with respect to each project's risk-adjusted expected rate of
return. Firms will undertake the most profitable projects first
John A. Vernon is a doctoral candidate in healthcare management and policy at the Whar- 9
ton School of the University of Pennsylvania. He holds a Ph.D. in economics and is an
assistant professor of finance in the Graduate School of Business at Baldwin-Wallace
College. He may be contacted by e-mail atjvernon @whartoi.upeiin.edu.

22 REGULATION WINTER 2002-2003

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