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The Economists’ Voice

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Volume 13, Issue 1


Are Biopharmaceutical Budget Caps Good Public Policy?

Dana P. Goldman
  • Corresponding author
  • University of Southern California, 635 Downey Way, Verna & Peter Dauterive Hall (VPD), 2nd Floor, Los Angeles, CA 90089-3333, USA
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/ Darius N. Lakdawalla / James R. Baumgardner / Mark T. Linthicum
Published Online: 2016-01-12 | DOI: https://doi.org/10.1515/ev-2015-0012


Medical innovation has generated significant gains in health over the past decades, but these advances have been accompanied by rapid growth in healthcare spending. Faced with a growing number of high-cost but high-impact innovations, some have argued to constrain prices for new therapies – especially through global caps on pharmaceutical spending and limits on prices for individual drugs. We show that applying this threshold to past innovations would have limited access to many highly valuable drugs such as statins and anti-retrovirals. We also argue that budget caps violate several important principles of health policy. First, budget caps treat healthcare spending as a consumption good, like going to a movie or buying a meal. However, healthcare spending should be viewed as an investment, whose benefits accrue over many years – much like spending on education. Second, budgetary cost is a poor indicator of value, thereby distorting coverage decisions. Third, affordability arguments often use a short-term horizon, thereby missing that long-term health is society’s ultimate goal. Fourth, assessments of benefit should incorporate not just the immediate clinical benefit to patients, but also long-term health improvements, cost savings, and increased productivity. Fifth, global budget caps arbitrarily anchor spending on the status quo, thereby setting too stringent a threshold for socially-desirable innovation. In sum, a solitary focus on short-term costs can be detrimental to population health in the long-run. When medical treatment decisions are properly viewed as investments, budget caps are not the answer; rather, we need to find mechanisms to encourage spending decisions based on long-term value. Only then can we generate health returns to societal investments, while also encouraging the new research and development necessary to extend the gains of recent decades.

Keywords: cost-effectiveness; health economics; pharmaceuticals


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About the article

Corresponding author: Dana P. Goldman, University of Southern California, 635 Downey Way, Verna & Peter Dauterive Hall (VPD), 2nd Floor, Los Angeles, CA 90089-3333, USA, e-mail:

aDana P. Goldman is Director of the Leonard D. Schaeffer Center for Health Policy and Economics, University of Southern California, Los Angeles, CA, USA.

bDarius N. Lakdawalla is the Quintiles Chair in Pharmaceutical Development and Regulatory Innovation,Schaeffer Center for Health Policy and Economics, University of Southern California, Los Angeles, CA, USA.

cJames R. Baumgardner is a senior research economist at Precision Health Economics, Los Angeles, CA, USA.

dMark T. Linthicum is an associate director and research scientist at Precision Health Economics, Los Angeles, CA, USA.

Published Online: 2016-01-12

Published in Print: 2016-12-01

Funding: Amgen Corporation.

Citation Information: The Economists' Voice, Volume 13, Issue 1, Pages 27–42, ISSN (Online) 1553-3832, ISSN (Print) 2194-6167, DOI: https://doi.org/10.1515/ev-2015-0012.

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