The Effects of the Affordable Care Act on Pharmaceutical Prices, Demand, and Innovation

Abstract: As the largest health insurance expansion in the U.S. since Medicaid and Medicare, the Patient Protection and Affordable Care Act (ACA) has differential impacts on different age groups. This paper hypothesizes and tests that the ACA demand shock mainly affects medicines targeting conditions that are prevalent in the working age population. Exploiting plausibly exogenous variation across medical conditions in their exposure to the ACA, this paper studies the causal effects of the ACA-driven demand shock on pharmaceutical prices, demand, and innovation. I find that medicines targeting conditions that are prevalent among younger workers were more cheaply priced before the reform because they were less likely to be covered by insurance. The insurance expansion of the ACA has eliminated this price discount as younger workers become less price elastic. I find that the ACA redistributes preclinical research and development (R&D) efforts on conditions that are prevalent in younger workers toward conditions with high prevalence among older workers. Under the assumption that innovation improves the quality of drugs, this redistribution of R&D efforts may improve labor productivity more effectively in the long run, because older workers, compared with their younger counterparts, are more in need of health-enhancing medicines. I find that the post-ACA increase in clinical R&D is driven by the influx of earlier preclinical developments rather than the immediate push of on-the-shelf projects