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Economic Regulation and Its ReformWhat Have We Learned?$
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Nancy L. Rose

Print publication date: 2014

Print ISBN-13: 9780226138022

Published to Chicago Scholarship Online: January 2015

DOI: 10.7208/chicago/9780226138169.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 22 September 2021

Regulation of the Pharmaceutical-Biotechnology Industry

Regulation of the Pharmaceutical-Biotechnology Industry

(p.407) 7 Regulation of the Pharmaceutical-Biotechnology Industry
Economic Regulation and Its Reform

Nancy L. Rose

University of Chicago Press

Pharmaceuticals and human biologic products (“pharmaceuticals”) are regulated in virtually all aspects of the product life-cycle: safety, efficacy and manufacturing quality, promotion, and pricing. The rationale for heavy regulation of pharmaceuticals is not intrinsic natural monopoly, since any market power enjoyed by individual products derives ultimately from government-granted patents. Rather, regulation of market access, manufacturing and promotion arise because product efficacy and safety are critical to patient health but not immediately observable. In contrast, price regulation is best understood as a response by public insurers to the fact that insurance makes consumers price insensitive. Although this suggests that regulation of the pharmaceutical industry is potentially welfare enhancing, designing the optimal structure of such regulation is complicated. Market access regulation entails resource costs and foregone patient benefits in terms of fewer drugs and drug launch delays. On the pricing side, regulation should ideally constrain pricing moral hazard while preserving insurance coverage for patients and incentives for research and development (R&D). Designing regulatory structures that are theoretically sound and empirically practical is a theoretical and policy challenge. This chapter describes the pharmaceutical industry and its worldwide regulation. Empirical evidence on various kinds of regulation is described, along with welfare and innovation implications.

Keywords:   pharmaceuticals, regulation, government-granted patents, market access, resource costs, regulatory structure

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