ECONOMIC IMPACT OF THE POLICY REFORM ON DRUG PRICE REVISION IN JAPAN: INTERMEDIATE APPRAISAL
To promote developing new drug and making off-label use applicable to public health insurance system, new premium was introduced at the 2010 drug price revision in Japan. We assess the effect of this drug premium policy on R&D expenditure and the job creation in high value-added R&D activities. The effect on GDP is also investigated, although the growth effect of R&D is not included in the analysis.
Method(s):
Using financial statements of 26 pharmaceutical companies in Japan from 2005-2013 (at most), R&D investment function á la Grabowski and Vernon (2000) is re-estimated in the recent Japanese context. We show here that the operating cash flows increase R&D investment. Additional cash flows resulting from drug price premium are plugged into the function to simulate the policy effect on R&D. And using input-output table to simulate the number of job creation and its effect on GDP.
Result(s):
Long run effect of the drug price premium on R&D expenditure through increasing future expected profit does not significantly different from zero. On the other hand, short run effect through increasing current cash flows is positively significant. From our dynamic specification, R&D expenditure is estimated to increase by 48.7 to 146 billion yen in the Japanese pharmaceutical industry in four years from 2010 to 2013. It then creates high-skilled job opportunity for 2600 to 7790 people and its contribution to GDP amount to 120 - 360 billion yen.
Conclusion(s):
The current policy of drug price premium is effective in stimulating R&D activities and creating high-skilled job opportunities. For instance, short term effect alone amount to 0.4 to 1.3 times as much as four years premium. In addition, the current policy of drug price premium at the biennial price revision is tentative one. If it were perpetual, long run effect would become identifiable. Aging and decreasing population give downward pressure on working population, so increasing added-value per worker will be the key to sustain financial burden of skyrocketing social securities including public health expenditure. This policy seems to be compatible not only for people’s health in Japan, but also for Japanese economy as a whole.