Incentives and Innovation: Pharmaceutical Research and Low-Income Groups Under the Proposed Medicare Prescription Drug Benefit

June 16, 2012

Competing visions of a Medicare prescription drug benefit often differ dramatically in their treatment of low-income groups. The profound implications of this treatment spread far beyond access to medical care, even reaching the process of technological innovation through which new drugs are produced. Low-income subsidies3 under proposed versions of the Medicare prescription drug benefit will significantly alter the incentives pharmaceutical manufacturers face, possibly resulting in the unexpected emergence of more innovative drugs from the R&D process as research focuses on the special needs of low-income groups.
The different prescription drug benefit proposals highlight the impact of law and policy in shaping the course of science, healthcare, and the socioeconomic status of Americans. Among the many economic consequences of such a benefit, significant changes will occur in the technological innovation of new drugs as manufacturers respond and adapt to a different marketplace. Evidence suggests that two primary forces will drive research toward more innovative outcomes. First, better access to drugs for low-income Medicare beneficiaries will increase drug demand and ease financial pressure on pharmaceutical producers to boost profits via minor variations of existing product lines.6 Second, for a variety of reasons, aging low-income groups tend to be in poorer health than their higher-income peers, resulting in greater demand for technologically complex drugs.