The effect of newer drugs on health spending: do they really increase the costs?

Abstract

Abstract. We analyze the influence of technological progress on pharmaceuticals on rising health expenditures using US State level panel data. Improvements in medical technology are believed to be partly responsible for rapidly rising health expenditures. Even if the technological progress in medicine improves health outcomes and life quality, it can also increase the expenditure on health care. Our findings suggest that newer drugs increase the spending on prescription drugs since they are usually more expensive than their predecessors. However, they lower the demand for other types of medical services, which causes the total spending to decline. A one-year decrease in the average age of prescribed drugs causes per capita health expenditures to decrease by $31.92. The biggest decline occurs in spending on hospital and home health care due to newer drugs.

New drugs and the growth of health expenditure: evidence from diabetic patients in Taiwan

“…As a result, the adoption of TZD drugs in Taiwan significantly increases the overall expenditure on health. This result is consistent with previous research by Duggan (2005), but contrasts with the previous findings of Lichtenberg (2001) and Civan and Köksal (2010).…”

“…For example, Lichtenberg (2001) finds that the adoption of new drugs tends to reduce all types of non‐drug health expenditure and that this effect dominates the increased expenditure on new drugs. A recent study by Civan and Köksal (2010) leads to a similar finding. Both studies use average drug age as a proxy measure for pharmaceutical innovation and hence do not investigate the potentially heterogeneous effects across drugs in different therapeutic groups.…”

“…Therefore, a growing body of empirical studies has paid attention to the effects on health expenditure of adopting pharmaceutical innovations. The findings from these studies are mixed, with some suggesting that the adoption of new drugs decreases total health expenditure, in spite of increasing spending on prescription drugs (Lichtenberg, 2001; Civan and Köksal, 2010), while others find the opposite (Duggan, 2005).…”

Estimating the Potential Annual Welfare Impact of Innovative Drugs in Use in Switzerland

“…These additional benefits including externalities may outweigh the drug expenditures, and in the end we may generate welfare gains due to the prescription of new drugs. There is also evidence in international literature that health care expenditure positively effects on outcomes (8, 9) and increase in drug spending leads to cost savings in other health care expenditures and these savings often outweigh the spending (10–12). Others argument that over the past 50 years, the majority of new products (up to 90%) have provided only few benefits, but also considerable harms that have added to national healthcare costs (13).…”

After 20 years, industry critics bury skeptics, despite empirical vacuum

“…Additional cost is often justified in particular patient populations because of improvements in the efficacy of the therapy, its side effects or its method of administration (pill rather than injection, fewer doses per day, etc.). Furthermore, large‐scale econometric analyses demonstrate that, on average, newer drugs pay for themselves by reducing non‐drug healthcare expenses, such as hospitalisations. Even absent such savings, they frequently add value to the healthcare system by improving patients’ life expectancies or quality of life by reducing disease specific morbidity and mortality and by enhancing economic productivity .…”