In 1993, the Clinton administration announced the Clinton health care plan which was then later known as the Health Security Act (HSA) (Golec, Hegde and Vernon 2010). This act, if successful, would provide all US citizens and permanent resident alien with universal health care coverage (Golec, Hegde and Vernon 2010). This example aims to evaluate how the HSA had an effect on R&D spending decisions, corporate stock prices and price regulation.
The HSA’s Effect on Pharmaceutical Stock Prices
Although the HSA failed, it had a direct impact on the behaviour of pharmaceutical firms. Specifically the events around the HSA triggered pharmaceutical stock price changes and a decrease in R&D spending (Golec, Hegde and Vernon 2010). This study examines the cumulative abnormal return (CAR) which is a measure used to calculate stock earnings (Golec, Hegde and Vernon 2010). In 1992, when Clinton issued the health care reform proposal the CAR of 111 pharmaceutical companies dropped by 8.41 %; furthermore, this triggered a series of events which led to the further decline in stock prices (see table 1).
Date Description of HAS - Related Event CAR (%)
19-Jan-92 Clinton issues Health care reform proposals. -8.41
18-Feb-92 Clinton unexpectedly finished second in the New Hampshire primary. -3.79
10-Mar-92 Clinton does well in the Super Tuesday primaries. -3.04
07-Apr-92 Clinton wins New York primary and becomes the favourite Democratic nomination. 1.01
04-Jun-92 Republicans in the House of Representative offer their health care reform proposal. -5.1
24-Sep-92 Clinton speaks at Merck on health care reform. -6.31
03-Nov-92 Clinton wins presidential election. -0.85
25-Jan-93 Hillary Clinton named ...
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The intention behind HSA was to provide government healthcare for all citizens and residents of the US. The Clinton administration acted in the interest of the public good by issuing the HSA. Although the HSA was rejected in congress, it was effective in regulating prices and it also uncovered inefficiencies in pharmaceutical companies’ R&D spending further serving the public good.
The HSA reduced R&D spending by about one billion dollars even though it never became a law; consequently, pharmaceutical companies now need to be more selective in the drugs they develop and would not be able to justify high drug prices due to R&D costs of failed and marketed drugs (Golec, Hegde and Vernon 2010). Furthermore, the public was also served when pharmaceutical companies pledged to keep their price increases below consumer inflation (Golec, Hegde and Vernon 2010).
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