Patient Welfare Implications of Innovation in the U.S. Antidepressant Market 1

Returns to innovation constitute a major component of social welfare. In this study, I formulate an empirical methodology that quantifies patient welfare benefits from pharmaceutical innovation in the U.S. antidepressant market. The antidepressant market has experienced an impressive stream of innovations over the last three decades and available data on antidepressants are exceptionally rich and accurate. The study employs an original dataset that consists of annual observations on prices, quantities and drug characteristics for every antidepressant medication sold in the U.S. market from 1980 to 2001 and demographic data on the distribution of patient income and prescription insurance. While evaluating pharmaceutical innovation in antidepressants, I uncover and address the moral hazard caused by the existence of pharmaceutical insurance coverage. The study estimates large patient welfare gains from innovation and helps explain the detected divergence between social and private patient benefits by the presence of insurance. These findings aid in public policy decision making on health care and pharmaceutical industry concerns.