Pharmaceutical Price Controls and Minimum Efficacy Regulation: Evidence from the United States and Italy

Objective. This article examines the relationship between drug price and drug quality and how it varies across two of the most common regulatory regimes in the pharmaceutical market: minimum efficacy standards (MES) and a mix of MES and price control mechanisms (MES + PC). Data Sources. Our primary data source is the Tufts-New England Medical Center-Cost Effectiveness Analysis Registry which have been merged with price data taken from MEPS (for the United States) and AIFA (for Italy). Study Design. Through a simple model of adverse selection we model the interaction between firms, heterogeneous buyers, and the regulator. Principal Findings. The theoretical analysis provides two results. First, an MES regime provides greater incentives to produce high-quality drugs. Second, an MES + PC mix reduces the difference in price between the highest and lowest quality drugs on the market. Conclusion. The empirical analysis based on United States and Italian data corroborates these results.