Market size and innovation: Effects of Medicare Part D on pharmaceutical research and development

Recent evidence suggests that Medicare Part D increased prescription drug use among seniors, and increased pharmaceutical firms' revenues from sales. Previous studies also indicate that increases in market size induce pharmaceutical innovation. This paper assesses the impact of the Medicare Part D legislation on pharmaceutical research and development (R&D), using time-series data on the number of drugs entering preclinical and clinical development by therapeutic class and phase. We find that the passage and implementation of Medicare Part D is associated with significant increases in pharmaceutical R&D for therapeutic classes with higher Medicare market share. ► Market expansion due to Medicare Part D could, in theory, induce innovation. ► We identify Part D's effect using variation in drugs' Medicare market shares. ► Preclinical and clinical testing significantly increased after Part D.