||The main goal of this paper is to develop an empirical framework for evaluating the
patient welfare benefits arising from pharmaceutical innovation. Extending previous
studies of the welfare benefits from innovation (Trajtenberg, 1990; Hausman, 1996),
this paper unpacks the separate choices made by physicians and patients in pharmaceutical
decisionmaking and develops an estimable econometric model which reflects these choices.
Our proposed estimator for patient welfare depends on (a) whether patients comply
with the prescriptions they receive from physicians and (b) the motives of physicians
in their prescription behavior. By focusing on compliance behavior, the proposed welfare
measure reflects a specific economic choice made by patients. We review evidence that
the rate of noncompliance ranges up to 70%, suggesting an important gulf between physician
prescription behavior and realized patient welfare. Since physicians act as imperfect
but interested agents for their patients, the welfare analysis based on compliance
must account for the nonrandom selection of patients into drugs by their physicians.
The key contribution of this paper resides in integrating the choices made by both
physicians and patients into a unified theoretical framework and suggesting how the
parameters of such a model can be estimated from data.