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U.S. consumers generate more pharmaceutical revenue per person than Europeans do. This has led some U.S. policymakers to call for limits on U.S. pharmaceutical spending and prices. Using a microsimulation approach, we analyze the welfare impacts of lowering U.S. prices toward European levels, and how these impacts vary with key modeling assumptions. Under the assumptions most favorable to them, price controls generate modest benefits (a few thousand dollars per person). However, for the remainder of plausible assumptions, price controls generate costs that are an order of magnitude higher. In contrast, publicly financing reductions in consumer prices, without affecting manufacturer prices, delivers benefits in virtually all plausible cases. [Health Affairs 28, no. 1 (2009): w138–w150 (published online 16 December 2008; 10.1377/hlthaff.28.1.w138)] E uropeans spend le s s than twoth irds as much on biopharmaceuticals per capita as Americans do. Although much of this gap is generated by use of more costly drugs in the United States, rather than pure price differences, there is no doubt that pharmaceutical companies earn more revenue per person in the United States than in Europe. There is growing concern among Americans about whether this spending disparity should persist, or whether new policies should be adopted to limit drug spending. Pharmaceutical pricing and access involve a trade-off between current and future generations. The prospect of higher future profits creates stronger incentives to innovate, which benefit the future generations who will use tomorrow’s inventions. Conversely, policies that ensure high profits typically impose greater spending burdens on patients using today’s innovations. As a result, policies that prow 1 3 8 1 6 D e c e m b e r 2 0 0 8 D r u g S p e n d i n g DOI 10.1377/hlthaff.28. 1.w138 ©2008 Project HOPE–The People-to-People Health Foundation, Inc. Darius Lakdawalla (darius@rand.org) is the director of research at the Bing Center for Health Economics at RAND in Santa Monica, California. Dana Goldman is chair and director of health economics, finance, and organization; Pierre-Carl Michaud is an associate economist, Economics and Statistics; Neeraj Sood is an economist; Robert Lempert is a senior physical scientist, Technology and Applied Sciences; and Ze Cong is an assistant policy analyst, all at RAND. Han de Vries is a policy analyst at RAND Europe in Cambridge, England. Italo Gutierrez is a doctoral student in economics at the University of Michigan in Ann Arbor. mote higher revenues benefit future generations, but possibly at the expense of today’s patients. Some critics have questioned the empirical validity of the link between profits and pharmaceutical innovation; however, a great deal of evidence suggests an underlying relationship between the two. The second important trade-off in pharmaceutical pricing is global in nature, because new treatments are of value to the entire globe. Thus, spending by Americans encourages innovations that benefit both Europe and the United States. As a result, U.S. spending cuts may harm Europeans. In this paper we analyze these trade-offs, and we investigate U.S. policy approaches that might overcome them. The heart of this exercise is a global microsimulation model of health and mortality, where morbidity and mortality are affected by baseline health, health behavior, and rates of innovation. We use the model to measure the impact of different policy choices on current and future generations of Americans and Europeans.