Almost all pharmaceuticals are purchased by third parties (insurance or government) through the use of reimbursements. Yet, as University of Chicago health economists Anupam B. Jena and Tomas J. Philipson demonstrate in their new book, Innovation and Technology Adoption in Health Care Markets (AEI Press, August 2008), reimbursement levels based on the cost-effectiveness of drugs—usually measured as the cost per quality-adjusted life-year saved by a drug—tend to sacrifice future drug development because they limit profits to be made and therefore discourage manufacturers from investing in useful innovation.

Based on the careful empirical analysis of drugs used to treat HIV/AIDS, Philipson and Jena conclude that drug manufacturers glean only about 5 percent of the mammoth returns brought about by these life-saving therapies. As a result, patients may be worse off than they would be with policies based less on cost-savings and more on incentives to develop new technologies. The implications of these findings, when taking account of other valuable drug classes, suggest that we face the prospect of paying less money for drugs now while getting far fewer new drug treatments later.

Joining the authors to discuss this important book will be pharmaceutical economist Christopher Adams from the Federal Trade Commission. AEI’s John E. Calfee will moderate.