Rexford E. Santerre

Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry

This paper argues theoretically and shows empirically that pharmaceutical R&D spending increases with real drug prices, after holding constant other determinants of research and development (R&D). Specifically, an estimated elasticity suggests that a 10 percent increase in the growth of real drug prices is associated with nearly a 6 percent increase in the growth of R&D intensity. Simulations that are based on our multiple‐regression model indicate that the capitalized value of pharmaceutical R&D spending would have been about 30 percent lower if the federal government had limited the rate of growth in drug price increases to the rate of growth in the general consumer price index during the period 1980–2001. Moreover, the results suggest that a drug price control regime would have resulted in 330–65 fewer new drugs, representing over one‐third of all actual new drug launches brought to the global market during that time period.

The Production Characteristics of Local Public Education: A Multiple Product and Input Analysis

Since the seminal work of Baumol, Panzer and Willig [1], economists have become increasingly interested in incorporating the multifaceted nature of real-world production functions into their empirical analyses. Multiproducts, multiple inputs and the relaxation of the long-run equilibrium condition are some prime examples of major innovations in production modeling. An excellent example of this innovative literature is the study by Cowing and Holtmann [7] that focuses on the short-run production characteristics associated with the hospital services industry. Specifically, Cowing and Holtmann find evidence contrary to long-run equilibrium and that economies of scope are at least as important as economies of scale in the production of hospital services. Moreover, several empirical studies relating to the production characteristics of other goods and services such as higher education [6], crime prevention [9], electric utilities [15] and airlines [5] have provided ample evidence that these pertinent factors matter from both an econometric and a policy perspective. The literature concerning the production characteristics of primary and secondary education, however, has lagged behind in terms of incorporating more realism into the analysis. Typically, studies concerned with primary and secondary education production [2; 3; 13; 14] maintain that schools operate at a long-run equilibrium position and produce a single output with a single input (i.e. teachers), thus assuming away factors which these other industry studies have found to be significant. In fact, Jimenez [12] is the only study to date on local primary and secondary education production that is based on less restrictive assumptions. Several limitations are associated with his research however. Each of these limitations reduce the generality of his findings concerning the production characteristics of primary and secondary education. First, Jimenez employs a small sample to obtain estimates of various production characteristics, bringing into question the overall

Comparing the Performance of Health Care Systems: An Alternative Approach*

The health care system in the United States has been diagnosed as a moribund institution by a large number of media commentators and health policy analysts. Continually rising health care costs and inadequate health insurance coverage for approximately thirty-seven million people are cited as two of the most visible symptoms supporting their diagnosis. Most of these individuals see little chance for the U.S. health care system to recover given its present design. Full recovery, they believe, requires the successful transplant of a health care system from another country. The health care systems in Europe and Canada, where government is assigned a much larger role than in the United States, are argued to offer universal health care coverage and simultaneously contain health care costs. Simple comparative statistics appear to support the view that the performance of the U.S. health care system could be improved through a new health care system design. Infant mortality in the United States ranked twentieth among twenty-four member countries of the Organization for Economic Cooperation and Development (OECD) in 1988. Yet, health care expenditures in the United States comprised 11.8 percent of gross domestic product in 1989, while the comparable average for all OECD countries was only 7.4 percent [28]. These statistics portray the U.S. health care system as being deficient and, therefore, unable to offer quality medical services at a reasonable price. Given the limited stock of information that exists on this issue, however, it is ill-advised to place full blame for the seemingly dismal performance on the U.S. health care system. The simple international comparisons fail to take into account that differences in performance are not solely due to variations in health care systems. While the design of a health care system, including the financing scheme, reimbursement method and organization of production, is indeed important because it influences how various economic, technological and demographic characteristics of a country are transformed into health outcomes, the performance of the health care system also depends on the magnitude of these national characteristics as well. A proper analysis would try to determine how the health care system itself specifically influences the performance of health

Market Structure and Technical Efficiency in the Hospital Services Industry: A DEA Approach:

This article uses data envelopment analysis and multiple regression analysis to examine empirically the impact of various market-structure elements on the technical efficiency of the hospital services industry in various metropolitan areas of the United States. Market-structure elements include the degree of rivalry among hospitals, extent of HMO activity, and health insurer concentration. The DEA results show the typical hospital services industry experienced 11 percent inefficiency in 1999. Moreover, multiple regression analysis indicates the level of technical efficiency varied directly across metropolitan hospital services industries in response to greater HMO activity and private health insurer concentration in the state. The analysis suggests the degree of rivalry among hospitals had no marginal effect on technical efficiency at the industry level. Evidence also implies that the presence of a state Certificate of Need law was not associated with a greater degree of inefficiency in the typical metropolitan hospital services industry.

Representative versus direct democracy: A Tiebout test of relative performance

This study has used a Tiebout-type empirical model to analyze the overall differences in performance between representative and direct democratic forms of local government. In agreement with the underlying theory of representative democracy, representative forms of local government are found to be significantly inefficient relative to the direct democratic form of local government. The findings also indicate that a great similarity in efficiency exists between council-manager and mayor-council forms of local government. Both forms of local government appear to be equally inefficient compared to the open-town meeting. Further empirical analysis demonstrates that the cost of local representative government failure may be as high as 13 percent of the typical communitys property tax base, which may be cause for some alarm. It should be mentioned that the results do not suggest that open-town meeting forms of government are necessarily efficient. (The median-voter model argues otherwise.) The results only indicate that the open-town meeting can be considered more efficient relative to the other forms of local government.

Does the U.S. health care sector suffer from Baumol's cost disease? Evidence from the 50 states.

This study examines if health care costs in the United States are affected by Baumols cost disease. It relies on an empirical test proposed by Hartwig (2008) and extended by Colombier (2010) and uses a panel data set of 50 states over the 1980-2009 period. The results suggest that health care costs grow more rapidly when economy-wide wage increases exceed productivity gains. The findings are fairly robust with respect to time- and state-fixed effects, individual state time trends, and two-stage least square estimation. Consequently, this study suggests that the U.S. health care sector suffers from Baumols cost disease.

Jurisdiction Size and Local Public Health Spending

OBJECTIVE To examine if a minimum efficient scale (MES) holds with respect to the population serviced by a local health department (LHD) given the congestability, externality, and scale/scope economy effects potentially associated with public health services. DATA SOURCES/STUDY SETTING A nationally representative sample of LHDs in 2005. STUDY DESIGN Multiple regression analysis is used to isolate the relation between population and spending while controlling for other factors known to influence local public health costs. DATA COLLECTION Data were obtained from the 2005 National Profile of Local Public Health Agencies, a project supported through a cooperative agreement between the National Association of County and City Health Officials and the Centers for Disease Control and Prevention. PRINCIPAL FINDINGS The MES of a local public health department is approximately 100,000 people. After that size, additional population has little impact on public health spending per capita. CONCLUSIONS Seventy-seven percent of LHDs in the sample fall below the 100,000 MES. Higher levels of government may want to provide financial inducements so that smaller LHDs consolidate or enter into agreements with larger public health organizations to provide services.

Do health insurers possess monopsony power in the hospital services industry

This paper uses metropolitan data to test empirically if health insurers possess monopsony or monopoly-busting power on the buyer-side of the hospital services market. According to theory, monopsony power is indicated by a fall in output, whereas, monopoly-busting power is shown by an increase in output when buyer concentration rises. The empirical results provide evidence that greater health insurer buyer concentration is not associated with monopsony power. Instead, some evidence is found to suggest that higher health insurer concentration translates into increased monopoly-busting power. That is, metropolitan hospitals offer increased services when the buyer-side of the hospitals services market is more highly concentrated.

Explaining the efficiency of local health departments in the U.S.: an exploratory analysis

No study to date has analyzed the efficiency at which local health departments (LHDs) produce public health services. As a result, this study employs data envelopment analysis (DEA) to explore the relative technical efficiency of LHDs operating in the United States using 2005 data. The DEA indicates that the typical LHD operates with about 28% inefficiency although inefficiency runs as high as 69% for some LHDs. Multiple regression analysis reveals that more centralized and urban LHDs are less efficient at producing local public health services. The findings also suggest that efficiency is higher for LHDs that produce a greater variety of services internally and rely more on internal funding. However, because this is the first study of LHD efficiency and some shortcomings exist with the available data, we are reluctant to draw strong policy conclusions from the analysis.

Assessing Consumer Gains from a Drug Price Control Policy in the United States

We use national data from 1960 to 2000 to estimate the demand for pharmaceuticals in the United States. We then simulate consumer surplus gains from a hypothetical drug price control policy that would have limited drug price increases to the rate of inflation from 1981 to 2000. Using a range of values for the real interest rate, coinsurance rate, and own-price elasticity of demand, we find that the consumer surplus gains from this policy equal