Assessing the Impact of

Pharmaceutical Innovation:
A Comprehensive Framework
by
Jack A. Meyer, Ph.D.
President, New Directions for Policy
Table of Contents
About the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i
About New Directions for Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ii
Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Key Facts and Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
The Increase in the Importance of Chronic Illness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
The Aging of the Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
The Evidence on the Impact of Pharmaceutical Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Traditional Approach to Research: Focus on Health Status and Health Care Spending . . . . . . . . . . . . . . . . . . . . . . . . .8
Analyses of New Technologies and Innovations in Pharmaceuticals: Health and Economic Effects . . . . . . . . . . . . . . . . .9
New Approach: Aggregate Studies Across All Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Enhanced Health Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Evaluating the Impact of All New Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
International Comparisons of the Value of Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Comparing Pharmaceutical Benefits Among U.S. Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Looking Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Reductions in Overall Health Care Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Macro-Analyses of the Impact of New Drugs on Overall Health Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Increased Economic Growth and Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Stimulating Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Enhancing Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Putting These Findings Together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

© February, 2002. New Directions for Policy

About the Author
Jack A. Meyer, Ph.D., is the founder and president of New Directions for Policy. Dr. Meyer has conducted policy analyses
and directed research on health care issues for several major foundations as well as federal and state government and the
business sector. He has led projects developing policy options for reforming the overall health care system and directed
research on employers’ innovations in health care purchasing. Many of these projects have highlighted new strategies for
extending health insurance coverage to the uninsured. Dr. Meyer is the author of numerous books, monographs, and
articles on topics including health care, welfare reform, and policies to reduce poverty.

About New Directions for Policy

New Directions for Policy (NDP) is a Washington-based organization that assists purchasers and providers of health care,
and government through policy research and analysis, strategic planning, and program evaluation. NDP’s purposes are to
promote more effective operation of the health care system, and to aid the development of sound public policy on health
care and social welfare issues. NDP analyzes the forces driving health care spending, designs innovative strategies to
improve financing and delivery systems, and evaluates reforms to extend health coverage to the uninsured.

Acknowledgements
The author would like to thank Larry Stepnick and Todd Kutyla for their valuable assistance in preparing this report.
Richard Levy of the National Pharmaceutical Council offered helpful advice throughout the project.

This paper was produced under a grant from the National Pharmaceutical Council (www.npcnow.org).

i
 Executive Summary

T
he key finding in this report is that new drugs are
yielding a wide range of benefits to our society that
more than justify the investment needed to
produce them. This report develops a comprehensive
framework for assessing the value of pharmaceutical
innovation that encompasses both the cost of bringing
new products to market and the direct and indirect
benefits. These benefits include improved patient health,
cost reductions in the health care system, and a more
productive, higher-growth economy. New Directions for
Policy reviewed numerous studies — most of them
conducted during the last few years — and synthesized
and assessed the results and conclusions from this
research. Based on our thorough review, we present the
following specific findings:
• Even the most conservative estimate of the value of
extending life, when juxtaposed with the associated
costs, shows a very large payback on the investments
in new drugs. Benefit-cost ratios that account for the
value of leisure and other “non-market” benefits, in
addition to the contribution to the economy made by
people who live longer, are very large and can be in
excess of 100 to 1.
• The number of hospital days declined most rapidly for
diagnoses with the greatest increase in the number of
drugs prescribed and the greatest use of new drugs.
The drop in outlays for hospital care is more than three
times the value of the associated increase in
pharmaceutical spending.
• Most of the increase in pharmaceutical spending that
has occurred in recent years is attributed to increases in
the volume of drugs taken by patients. Inflation in the
prices of existing drugs accounts for only a very small
proportion of the increase, and in some cases, has
made no contribution to rising outlays for drugs. The
price effect associated with the introduction of new
drugs has also made a relatively small contribution to
the total spending increase.
• Volume increases are comprised of a greater
proportion of people in the population who are using
pharmaceuticals, more prescriptions per person, and
more days of use per prescription. The use of
pharmaceuticals to treat asthma illustrates the way
these components of increased use can reduce under-
care, improve health outcomes, and reduce hospital
and emergency room use.
• A few “priority” health conditions, such as
cardiovascular disease, pulmonary disease, cancer, and
diabetes, account for about three-fourths of all deaths
in the U.S. Similarly, a few chronic conditions such as
asthma, hypertension, and diabetes account for a very
large share of total health care spending.
Pharmaceuticals can be an integral part of disease
management programs that help patients control their
symptoms, reduce the incidence of flare-ups, and lead
healthy and productive lives.

• Changes in the medical treatment of heart attacks are

responsible for 55 percent of the 30 percent decline in
mortality associated with heart attacks that occurred
over a twenty-year period. Pharmaceuticals alone were
responsible for over one-quarter of the overall
reduction in mortality — by far the single most
important factor explaining the decline.

• Increased life expectancy has had a major positive

impact on U.S. economic growth. Pharmaceutical
innovation has contributed to the gain in life
expectancy, and has therefore helped strengthen our
economy.

ii
Framework

T
he purpose of this have a dosage schedule that
report is to develop a A new drug may be more effective in facilitates better patient
new framework for compliance (e.g., once a day
assessing the impact of improving a medical condition, have a versus four times a day), or
pharmaceutical innovation have fewer side effects.
on health status, health dosage schedule that facilitates better Each of these characteristics
expenditures, and our could yield better health
economy. The goal is to patient compliance, or have fewer side outcomes and savings
develop a comprehensive throughout the health care
approach to analyzing both effects. Each of these characteristics could system.
the costs and benefits of
pharmaceutical innovations yield better health outcomes and savings Second, pharmaceutical
in order to determine R&D may help patients be
whether society is getting a throughout the health care system. more active and productive.
good return on its This could yield benefits
investment in new drugs. outside the health care
system. These benefits might take the form of reduced
The current debate is much too narrow. It focuses absenteeism from work, greater labor productivity, and
mainly on the cost of drugs and largely ignores the lower employee turnover. These benefits would be
benefits. When benefits are included in the analysis, they realized by employers and employees in the form of
are measured quite restrictively. The question most higher profits and higher wages.
frequently asked under the “conventional wisdom” is,
“Do drugs cost too much?” But this is a hard question to Third, pharmaceutical innovation helps people live
answer in a vacuum — outlays for drugs must be assessed longer. Added years of life generate both costs and
in terms of what benefits they produce. The framework benefits for society. On balance, this report will show
developed here looks at outlays for drugs as a social that the benefits of pharmaceutical innovation outweigh
investment and therefore seeks to determine the return the costs.
that such an investment yields, and whether the return
justifies the outlay. The effects of an aging population will reach a “take-
off” stage at the end of this decade as the baby-boom
An appropriate framework for evaluating the yield on generation enters their retirement years. The number of
investments in new drugs would include a comparison of workers supporting each retiree will fall from more than
outlays for drug innovation with the following types of three to about two over the next 20 to 30 years. As
benefits. First, to the extent that new pharmaceuticals documented below, chronic illnesses have become far
improve patients’ health, there will be savings within the more important in the overall health care picture than
health care system. For example, if the introduction of used to be the case. As demographic trends unfold
new products helps patients to fully recover from acute against this backdrop, the critical challenge for our society
care episodes and/or manage chronic illnesses so that they will be to find effective ways of managing chronic illness
have fewer flare-ups and complications, there will be and helping elderly people with disabilities stay active and
savings in the form of fewer visits to the emergency room, remain in the community. This involves developing
fewer or shorter stays in the hospital, and less physician alternatives to traditional institutional care. Finding ways
care. If a new, more expensive drug replaces an older to help older workers remain on the job, or return to
drug, but that new drug improves medical management work following a complication of a medical condition, will
of diseases and chronic illnesses, the savings need to be also take on great importance.
juxtaposed with the extra cost. A new drug, for example,
may be more effective in improving a medical condition,

Yield on Society’s Investment in New Drugs

• Savings within the health care system
• Savings outside the health care system
• Savings from added years of life
1
 Pharmaceuticals will be a key component of disease
management programs, particularly in the case of chronic
illness and disability. In assessing their value, it will be
important to adopt a framework that accounts for such
key outcomes as living longer, working productively, and
managing disabilities so that individuals can remain active
and independent. Pharmaceuticals have the potential to
contribute to a lower “dependency ratio” by maintaining a
larger pool of working people and by helping non-workers
live independently.
These issues rarely enter the public debate about the
value of pharmaceuticals. Yet, they may be crucial to a
determination of the cost-effectiveness of innovation in this
field. This report discards the narrow discussion about
whether particular drug prices are “too high” and focuses
instead on the more comprehensive question of whether
investments in pharmaceutical research and innovation
have a positive payoff for society. The answer to this
question requires an objective review of the costs and
benefits (both direct and indirect) of this outlay.

This report broadens the framework for assessing the The development of a comprehensive and long-term
value of pharmaceuticals to include the full range of perspective for evaluating drug innovation is challenged by
potential benefits from pharmaceutical innovation. It the fact that third-party payers frequently face very short-
addresses the following questions: term, tight budget constraints. This makes it difficult for
them to factor in potential savings that may occur outside
1. What is the overall impact of pharmaceutical innovation of the pharmacy budget over extended periods of time.
on the health and functional status of our population? States purchasing drugs under Medicaid, HMOs, and
hospitals not only work within tight budgets, but also
2. What is the effect of this innovation on life expectancy? frequently examine each component of the health care
budget within “closed
3. What is the effect on In assessing [the value of bins” that ignore cross-
health care spending? sector spillover effects. This
pharmaceuticals], it will be important to may fail to capture some
4. What is the effect on the key sources of savings and
economy, including such adopt a framework that accounts for such bias the results against
potential outcomes as innovation.
changes in days lost important outcomes as living longer,
from work and labor
productivity? working productively, and managing
disabilities so that individuals can remain
active and independent.

2
Key Facts and Trends
Outpatient pharmaceutical spending in the U.S. totaled
$117 billion in 2000, or about 1.2 percent of our gross
domestic product.1 Outpatient drugs accounted for about 9
percent of the health care dollar in 2000. Drug spending
increases have outpaced spending on other health care
services in recent years (e.g., there was a 16.9 percent
increase in drugs in 1999 compared with a 3.7 percent
increase for hospital care and a 6.0 percent increase for
physician services).2 Drugs are the most research-intensive
industry in the U.S. As shown in Figure 1, R&D as a percent
of sales amounts to 17.0 percent in domestic research-
based pharmaceuticals (15.6 percent in global research-
based pharmaceuticals). The former figure is about two-
thirds higher than the corresponding proportion in
computer software, more than three times higher than in
telecommunications, and more than four times the average
for all U.S. industries (excluding drugs and medicine).

Figure 1
Research Intensity of Various Industries, 2000
Industrial Sector R&D as a % of Sales
Research-based pharmaceutical companies a

Domestic R&D 17.0%

Global R&D 15.6%
Industrial Sector Comparisonb
Drugs & Medicinec 12.8%
Computer Software & Services 10.5%
Electrical & Electronics 8.4%
Telecommunications 5.3%
Aerospace & Defense 3.8%
All industries excluding “Drugs & Medicine” 3.9%
a
“Research-based pharmaceutical companies” based on ethical pharmaceutical sales and ethical
pharmaceutical R&D only, as tabulated by PhRMA.
b
Standard and Poor’s Compustat – 4 digit SIC Codes.
c
“Drugs and Medicine” based on total R&D and sales for companies classified within the “Drugs &
Medicine” sector, as tabulated by Standard & Poor’s Compustat (includes both research-based and non-research-
based companies).
Source: PhRMA, Pharmaceutical Industry Profile 2001, Figure 2-3, based on PhRMA calculations and
Standard and Poor’s Compustat.

A recent study by Dubois and colleagues disaggregated
the overall trend in drug spending. They concluded that
price inflation for existing drugs was just one of six factors
— and for most therapeutic categories the least important
factor — explaining the increase.3 The factors are listed
below:
3. Changes in the mix of existing therapies toward more
costly agents;
4. Increased quantity of drugs per patient;
5. Introduction of new therapeutic agents; and

1. Growing prevalence of identified and treated medical 6. Inflation of existing product prices.
conditions;

2. Demographic shifts toward an older population;

1
Data from the Center for Medicare and Medicaid Services, “National Health Care Expenditures Projections (2000-2001).”
2
Ibid.
3
Dubois, R. et al. “Explaining Drug Spending Trends: Does Perception Match Reality?” Health Affairs, 2000; 19(2): pp. 231-9. 3
 Examining trends over several categories of drugs for a
three-year period, the authors found that “although the
average transaction price rose in every case but one, the
impact on the rise in drug spending was greatly exceeded
by that of growth in medication volume. The relative ratios
of increased volume to increased price ranged from a low
of 2.5:1 for hormone replacement therapy to more than
10:1 for gastrointestinal agents and lipid-lowering drugs.”
Figure 2 shows that for several disease and product
categories, the effect of volume factors on spending
increases greatly exceeded price factors. In the case of
antidepressants, for example, the overall increase in
spending over a three-year period was 85 percent,
comprised mostly of the various components of volume
effects. The price inflation of existing products only
accounted for 7 percentage points of the 85 percent
increase, and the price impact of the introduction of new
products accounted for only 2 percentage points.

Figure 2
Volume Accounts for Much of the Spending Changes
for Categories of Drugs
Total % Change in Spending
Price Factors Volume Factors for Drugs Treating Condition

Asthma 11 83 94
Hormone Replacement 63 156 219
Therapy
Antidiabetics 21 73 94
Antihyperlipidemics -1 81 80
Antidepressants 19 66 85
Antihistamines 14 53 67
Gastrointestinal 3 40 43

Asthma and hormone replacement therapy analyses use data from 1995 and 1998; all other categories use data from 1994 and 1997.
Source: Dubois, R. et al. “Explaining Drug Spending Trends: Does Perception Match Reality?” Health Affairs, 2000; 19(2): pp. 231-9.

The study by Dubois and colleagues illustrates how This increase in pharmaceutical management of asthma
volume increases may be linked to improved preventive was associated with a decline in asthma-related hospital
care. As shown in Figure 2, price factors accounted for 11 admissions. While it is difficult to establish cause-and-effect
percentage points of the total growth in asthma spending, with certainty, hospital admissions by patients with asthma
while volume factors accounted for 83 percentage points. declined by 35 per 1,000 patients over the period and
The number of patients being treated for asthma emergency room visits declined by 31 per 1,000 patients.
increased, and the use per patient rose as well. For These savings helped to offset the increase in spending for
example, the increase in the number of asthma patients asthma drugs. The increases in overall spending for
being treated accounted for about a quarter of the pharmaceuticals to treat asthma suggest not that there is
spending growth. In addition, the a problem with increased drug prices,
proportion of patients with asthma Increased volume due to but that increased volume due to
who used at least one prescription for appropriate disease management is
inhaled corticosteroids increased from appropriate disease driving spending and leading to
24 percent to 40 percent over this better preventive care. This example,
period. The percent of patients using management is driving then, also illustrates the type of
three or more canisters of medication benefits and cost savings that can be
during a year’s time doubled, from 9 spending and leading to realized when one looks at drug
percent to 19 percent. spending increases in a broader
4 better preventive care. framework.
The Increase in the We have much work to do in this area. A study by
Shuster and colleagues found that only 60 percent of

Importance of Chronic Illness
An estimated 125 million Americans suffered from
chronic illness in 2000, 20 million more than the
number forecast for this year in 1996. This figure is
projected to reach 157 million in 2020, when one in
four Americans will be living with multiple chronic
conditions.4 In 2000, medical costs for people with
chronic conditions totaled $774 billion. A person with
a chronic condition has, on average, medical
expenditures of $6,032 per year ($16,245 if the
person also has a functional limitation). These figures
compare to outlays of only $1,105 for a person in
good health.5 Compared to people suffering only from
acute health episodes, the annual medical costs per
person were more than double for people with one
chronic condition, and almost six times higher for
people with two or more chronic conditions.
In fact, four major chronic conditions —
cardiovascular disease, cancer, chronic obstructive
pulmonary disease, and diabetes — account for almost
three-fourths of all U.S. deaths. Pharmaceutical
products play an important role in the treatment and
management of each of these four conditions. Many
individuals suffering from these chronic conditions are
among the top 1 percent of patients whose health
care outlays account for 30 percent of all health care
spending, while the bottom 50 percent of patients
generate combined outlays that account for only 3
percent of spending.6 This disparity in spending calls
for the placement of a high priority and the
concentration of considerable effort on determining
better ways to manage the illnesses and chronic
conditions of the relatively small segment of the
population who are critically and/or chronically ill.
patients received recommended care for chronic illness
while 20 percent received contraindicated care.7
Despite the progress noted above, only 27 percent of
patients with asthma receive an inhaled anti-
inflammatory drug to control symptoms.8 Among
women over 50 years of age, 38 percent had not
received a mammogram in the preceding 18 months.9
More than half (54 percent) of Medicare patients with
diabetes did not receive an eye exam by an
ophthalmologist during a year’s time, and 84 percent
did not receive a Hemoglobin A1c exam — both
standard practice in avoiding complications of
diabetes.10
The Aging of the Population
The U.S. is facing an aging population. The number
of people aged 65 and over is expected to rise from
about 36 million today to about 70 million in 2030.
The fastest growing segment of this group is
comprised of people 85 years of age and older. Their
share of the total population is projected to increase
from 1.4 percent in 1995 to 2.4 percent in 2030 and
4.6 percent in 2050 (Figure 3).
The conventional wisdom has held that this trend
will lead to a large increase in health care spending
and a gloomy outlook for the financial stability of the
Medicare program. Indeed, the elderly do use
considerably more health services — including drugs
— than do the nonelderly. For example, people 65 to
74 years of age use four times as many prescriptions
as those who are between the ages of 19 and 44.11

4
Wertheimer, A., O’Connor, T., Levy, R. The Value of Incremental Pharmaceutical Innovation for Older Americans. Philadelphia: Temple
University. 2001.
5
Alliance for Health Reform Issue Brief, America’s Most Ignored Health Problem: Caring for the Chronically Ill, June 2001.
6
Institute of Medicine, Crossing the Quality Chasm. Washington, D.C. 2001.
7
Shuster, M., McGlynn, E., Brook, R. “How Good is the Quality of Health Care in the United States?” Milbank Quarterly, December
1998; 76(4): pp. 517-563.
8
Ozminkowski, et al. “Cost Implications for the Use of Inhaled Anti-Inflammatory Medications in the Treatment of Asthma.”
PharmacoEconomics, September 2000; 18(3): pp. 253-64.
9
Stoner, T., et al. “Do Vouchers Improve Breast Cancer Screening Rates? Results from a Randomized Trial.” Health Services Research,
1998; 33(1): pp. 11-28.
10
Weiner, J., et al. “Variation in Office-Based Quality: A Claims-Based Profile of Care Provided to Medicare Patients With Diabetes.”
Journal of the American Medical Association, 1995; 273(19): pp. 1503-8.
11
Neuman, T. Improving Prescription Drug Coverage: Opportunities and Challenges for Reform (Testimony
before the Senate Finance Committee), Henry J. Kaiser Family Foundation, March 2001.
5
 Figure 3
An Aging Population Will Put More Pressure
on the Health Care System
25%

20%
% pop. over 65
15%
% pop. over 85

10%

5%

0%
2000 2010 2020 2030 2040 2050

Source: U.S. Census Bureau Projections.

Going forward, seniors will continue Cutler also notes that there was a
to use more health resources than will sharp increase in the use of
the younger population. But the key
Reduction [in nursing nonsteroidal anti-inflammatory drugs
to making our social insurance
systems viable and controlling overall
home stays] translates into over the past three decades, and
suggests that this could account for
health spending hinges on trends in why disability for persons with
disability, functional limitations, and
savings of $18.9 billion. arthritis has fallen so dramatically in
most important, rates of recent years. Similarly, he observes
institutionalization. New evidence suggests that the gloomy the connection between the marked rise in
forecasts may need to be revised if recent trends in the antihypertension medication in the 1970s and early 1980s
incidence of disability continue. A 2001 study by Kenneth and the decline in the incidence of strokes in recent
Manton and XiLiang Gu found an acceleration in the decades.14 Manton and Gu also found a substantial
decline in chronic disability over the last two decades. From reduction in the use of institutional care among the elderly.
1988 to 1989, the incidence of disability among the elderly The proportion of those 65 years of age and older that
declined 0.26 percent per year; from 1989 to 1994, the were in an institution fell from 6.8 percent in 1982 to 6.1
reduction was 0.38 percent per year; and from 1994 to percent in 1989, and to 4.2 percent in 1999 (Figure 4). The
1999, it was 0.56 percent per year (see Figure 4).12 These study found that there were 400,000 fewer nursing home
statistics are reinforced by new findings reported by David stays in 1999 than there would have been had the 1994
Cutler, who concludes that several measures of disability — prevalence of disability persisted. Since nursing homes are
including overall health, institutionalization, dependency so much more costly than other living arrangements, this
rates, and functional impairment — are improving for the reduction translates into savings of $18.9 billion. The
elderly. For example, whereas 25 percent of the elderly authors also found that the decline in the incidence of
were dependent in 1984 (as measured by ability to perform disability is large enough to make a major difference in the
activities of daily living), only 19 percent were dependent in prospects for the Medicare Trust Fund. They conclude that
1999. One survey of functional impairment found a rapid the relative rate of improvement from 1994 to 1999 was
decline of 3.2 percent per year.13 considerably faster than the rate needed to preserve
Medicare solvency through 2070.15

12
Manton, K., Gu, X. “Change in the Prevalence of Chronic Disability in the United States Black and Non-Black Population Above Age
65, 1982-1999.” Proceedings of the National Academy of Sciences, 2001; 98(11): pp. 6354-9.
13
Cutler, D. “Declining Disability Among the Elderly.” Health Affairs, 2001; 20(6): pp. 11-27.
14
Ibid.
6 15
Manton, K., Gu, X. 2001.
 Figure 4
Decline in Disability and Institutionalization of the Elderly
Average annual decline in incidence of disability

1988-89 0.26%

1989-94 0.38%

1994-99 0.56%

Proportion of elderly in an institution

1982 6.8%

1989 6.1%

1999 4.2%

Source: Manton & Gu, 2001.

The proportion of those 65

According to studies by Manton years of age and older that at home, with relatives, or in assisted
and Pardes, declines in disability living facilities — as well as nonelderly
rates are consistent with the were in an institution fell adults and children with chronic
introduction of new pharmaceutical illnesses and functional impairments.
technologies due to the maturation from 6.8 percent in 1982 to These will be the “high-cost users”
of major areas of biomedical who fill emergency rooms and
research (for example, osteoporosis, 6.1 percent in 1989, and to comprise a large share of hospital
stroke, Parkinson’s disease, and stays. In many cases, their institutional
congestive heart failure).16 Manton 4.2 percent in 1999. care can be avoided or shortened
cited the use of hormone through appropriate disease
replacement therapy, which has management. Prescription drugs are
increased steadily since 1982, as an example. Over 10 an important element of this strategy. In evaluating how
million women are now taking this therapy, which pharmaceuticals contribute to disease management for
substantially reduces the incidence of osteoporosis, a major chronically or critically ill patients, it is important to
cause of disability in older women. If these trends understand the costs and benefits of pharmaceutical
continue, the key challenge in the new century will be to innovation.
manage the illnesses of seniors living in the community —

16
Pardes H., et al. “Effects of Medical Research on Health Care and the Economy.” Science, 1999; 283(5398): pp. 36-43. 7
 The Evidence on the Impact of
Pharmaceutical Innovation
This section reviews research findings on the impact of
pharmaceutical R&D and the use of new drugs on health
status, overall health care expenditures, and the economy.
It begins with a brief review of the more conventional
approach to this research — studies that evaluate the
impact individual drugs or classes of drugs have on health
status and spending to treat specific conditions. It then
highlights findings from studies that examine the broader
health and economic effects of specific medical
innovations. Finally, this review looks at a relatively new
approach to research — one that evaluates from an
aggregate perspective the impact of all new drugs.
Traditional Approach to Research:
Focus on Health Status and Health
Care Spending
Much of the research on the impact of drugs highlights
the benefits of individual drugs or classes of drugs for
specific medical conditions. Working within this
framework, researchers have found that many drugs
appear to be quite effective in enhancing health status and
reducing costs. For example, studies have found that
specific types of drugs have been able to enhance health
status while simultaneously reducing health care costs:
program also enhanced patients’ ability to perform
activities of daily living by 15 percent and reduced the
death rate from the expected 25 percent to 10 percent.
The program relied extensively on pharmaceuticals; drug
costs jumped by 60 percent, but these increased
expenditures were more than offset by a 78 percent
decline in hospital costs.18
• New drugs have helped reduce the mortality rate for
AIDS and HIV patients significantly, while simultaneously
reducing the need for hospitalization. One study found
that providing patients with full access to new AIDS
drugs saved the Department of Veterans Affairs $18
million in treatment costs.19
• A study sponsored by the Agency for Healthcare
Research and Quality (AHRQ) found that greater use of a
blood-thinning agent could prevent 40,000 strokes each
year, saving $600 million annually in health care costs.
The average annual cost of the drug and monitoring was
$1,025, compared to the $100,000 lifetime cost of
stroke treatment.20
• Patients treated with beta-blocker drugs after a heart
attack are 40 percent less likely to die in the two-year
period following the heart attack than are heart attack
victims who do not receive these drugs.21

• Use of angiotensin-converting enzyme (ACE) inhibitors
has been shown to reduce mortality by 16 percent in
patients with congestive heart failure. The same study
documented a $9,000 reduction in per-patient hospital
costs over a three-year period.17
• In a study examining treatments for congestive heart
failure, Humana Hospitals found that a year-long disease
management program for roughly 1,100 patients with
congestive heart failure resulted in a net $9.3 million
reduction in health care costs. This disease management
Other studies have also documented cost reductions
associated with the use of specific drugs. For example, a
study sponsored by the National Institutes of Health (NIH)
found that prompt use of tissue plasminogen activator
(t-PA) reduced the costs of treating a stroke patient by an
average of $4,400 by reducing the need for
hospitalization, rehabilitation, and nursing home care.
Greater use of this medicine could save the health care
system more than $100 million a year.22

17
The SOLVD Investigators. “Effect of Enalapril on Survival in Patients with Reduced Left Ventricular Ejection Fractions and Congestive Heart
Failure.” New England Journal of Medicine, 1991; 325(5): pp. 293-302.
18
“Provide Education about Congestive Heart Failure and Pump Up Your Savings,” Managed Healthcare, 1998; 8(4).
19
Rahman, A., et al. “Inversion of Inpatient/Outpatient HIV Service Utilization: Impact of Improved Therapies, Clinician Education, and Case
Management in the U.S. Department of Veterans Affairs.” F.D.C. Reports, July 20, 1998.
20
Matchar, D., et al. Secondary and Tertiary Prevention of Stroke Patient Outcomes Research Team (PORT) Final Report – Phase I, AHRQ Pub. No.
00-N001, Rockville, MD: Agency for Healthcare Research and Quality, June 2000.
21
Gottlieb, et al. “Effect of Beta-Blockade on Mortality among High-Risk and Low-Risk Patients after Myocardial Infarction,” The New England
Journal of Medicine, 1998; 339(8): pp. 489-497; Levy, R. “What to Tell Patients About the Cost-Benefit of Medications,” Wellcome Trends in
Pharmacy, January 1993.
22
Fagan, S., et al. “Cost-effectiveness of Tissue Plasminogen Activator for Acute Ischemic Stroke. NINDS rt-PA Stroke Study Group,” Neurology,
1998; 50(4):883-90; National Institutes of Health, National Institute of Neurological Disorders and Stroke. New Stroke Treatment Likely to
8 Decrease Health Care Costs and Increase Quality of Life. News Release, April 22, 1998.
 A recent review of a series of incremental pharmaceutical
innovations shows important benefits across a number of
different diseases and chronic medical conditions.
Incremental, small changes in dosage form, formulation, or
molecular configuration of pioneer compounds provide the
following benefits: 1) fewer side effects; 2) improved drug
safety and effectiveness; 3) greater ease of use, increasing
compliance; and 4) treatments better tailored to individual
patient needs.23 Other benefits accrue when new clinical
uses of existing medications are discovered.
Analyses of New Technologies and
Innovations in Pharmaceuticals:
Health and Economic Effects
Bringing patients back to good health has beneficial
effects that extend beyond the health care system. Some
studies have found that drugs contribute to greater
productivity, primarily by reducing lost school and work days.
• Medical costs declined by $822 per employee per year
and absenteeism dropped by nine days when depressed
workers were treated with a range of anti-depressant
medicines. Savings from improved productivity and the
reduction in work loss and medical costs far outweighed
the cost of drug treatment.24
• A study showed that a drug for migraine headaches
saved employers $435 per employee per month by
reducing lost productivity due to migraine headaches; the
drug itself cost $44 per employee per month.25
However, benefits of medical innovations can be
examined even more broadly, encompassing the values of
longer and improved quality of life. In a recent study, David
Cutler and Mark McClellan present findings of a very large
payback from new technology in medicine.26 In four out of
five conditions they analyzed — heart attack, low birth-
weight, depression, and cataracts — Cutler and McClellan
find the estimated benefit of technological change to be
much greater than the cost. In the case of breast cancer
treatment, the costs and the benefits were found to be
roughly equal. The authors claim that “[t]he benefits from
lower infant mortality and better treatment of heart
23
Wertheimer, A., Levy, R., O’Conner, T. “Too Many Drugs? The Clinical and Economic Value of Incremental Innovations.” Reasearch In Human
Capital and Development: Investing in Health: The Social and Economic Benefits of Health Care Innovation, 2001; 14: pp. 77-118.
24
Rizzo, J., et al. “Labor Productivity Effects of Prescribed Medicines for Chronically Ill Workers,” Health Economics, 1996; 5(3): pp. 249-65.
25
Legg, R., et al. “Cost-effectiveness of Sumatriptan in a Managed Care Population,” American Journal of Managed Care, 1997; 3(1): pp. 117-22.
26
Cutler, D., McClellan, M. “Is Technological Change In Medicine Worth It?” Health Affairs, 2001; 20(5): pp. 11-29.
27
Ibid.
28
Cutler, D., Meara, E. “The Technology of Birth: Is It Worth It?” Frontiers in Health Policy Research. vol. 3, ed. A. Garber. Cambridge, MA: MIT
Press, 2000.
attacks have been sufficiently great that they alone are
about equal to the entire cost increase for medical care
over time.”27
Though the costs of treating both heart attack victims
and low-birth-weight babies have increased considerably
over the last few decades, the life-years added from more
aggressive treatment using advanced technologies,
including drugs to control blood pressure and cholesterol
levels, more than make up for that cost. Cutler and
McClellan estimate the value of an added life-year to be
about $100,000 (see explanation of valuation of a life-year
on page 15). However, to assess the net gain realized from
those life-years, the authors also consider the cost of future
medical care, given that an individual will now live longer,
and as a result, will likely use more medical resources in
those added years.
To analyze the benefits of new technology in heart
attack patients, the authors use Medicare claims data.
Since most elderly and disabled heart attack survivors do
not work after the attack, the authors assume that there
are no productivity benefits from increased longevity. They
subtract the value of the basic medical and non-medical
cost of living from the estimate of the value of a life-year
($100,000). This yields a figure of $70,000 for the net
present value of technological innovation. In contrast the
costs of treatment increased about $10,000. Therefore, the
net gain of technological advances in the treatment of
heart attacks from 1984 to 1998 is about $60,000 per
heart attack ($70,000 in benefits versus $10,000 in
increased costs).
Analyzing data on low-birth-weight babies, David Cutler
and Ellen Meara found that the treatment costs increased
sharply over the 1950 to 1990 period, primarily because
there was little that could be done for these infants a half
century ago. With special ventilators and other new
technology, the present value of lifetime treatment cost per
child rose to $40,000 by 1990. The authors incorporate the
fact that babies surviving will both work (unless they are
disabled, which was accounted for in the analysis) and
consume resources. Netting out the offsetting forces
(contributions to growth and productivity from work, on
the plus side, and medical resources consumed, on the
minus side), they find that the ratio of benefits to costs is a
startling 6 to 1, or $200,000 per low-birth-weight infant.28
9
 New drugs to treat depression have also been shown to of drugs in current use owe their overall therapeutic
be cost-effective when a comprehensive framework for effectiveness and clinical significance to important
measuring costs and benefits is adopted. Treatment with modifications in the first generation of drugs.32 For
fluoxetine, a selective serotonin reuptake inhibitor (SSRI) example, third-generation antihistamines, developed from
was found to involve total direct health care costs of the active ingredients of the second-generation agents,
$1,970 over a six-month period. Treatment with retain the activity of the parent compound but with
imipramine and desipramine, two older products (tricyclics), improved tolerability, improved pharmacokinetics, fewer
involved costs of $2,100 and $2,400, respectively.29 side effects, and greater safety. In another example,
Furthermore, SSRIs have fewer side effects and a greater cephalosporin antibiotics are now available in four
likelihood that patients will comply with the course of generations of agents, each providing certain benefits that
treatment. This means that in addition to having somewhat might be missing in the prior version. Fourth-generation
lower direct costs, SSRIs will yield greater offsets to cost in agents, for example, have broad-spectrum gram-negative
the form of lower co-morbidity, lower rates of and gram-positive activity comparable to that of first-
hospitalization, and simplified follow-up outpatient care. generation agents. But the newest agents give physicians
the ability to tailor treatment to combat several different
A similar study by Professor Ernst Berndt found that the types of infections, the availability of injectable, topical,
shift from psychotherapy and tricyclic medications (older and oral dosage forms, and a choice between short-acting
technology) to selective serotonin reuptake inhibitors and long-acting agents, depending on the nature of the
(SSRIs) was accomplished at virtually no net cost. infection, including bacterial strains heretofore resistant to
Furthermore, SSRIs have lower “drop-out rates” and fewer existing antibiotics.33
side effects than other drugs, and they cost patients less
than psychotherapy. Berndt and colleagues found that this Cutler and McClellan’s evidence constitutes a powerful
treatment substitution was able to control the symptoms argument for technological advancement in the care of
(i.e., achieve remission) of mental illness for about 20 acute conditions. But these types of advances in
percent less in outlays.30 Drawing upon research findings intechnology alone are not the answer to the problem of
the literature, Cutler and McClellan estimate that the rising health care costs. For those suffering from serious
overall value of spending less time depressed is more than conditions — low-birth-weight babies and adults with
six times the cost of treating depression.31 heart disease, for example — technology certainly provides
the most cost-effective treatment. However, never to have
A new study by Wertheimer, Levy, and O’Conner shows to treat a chronic or acute condition in the first place is still
that incremental innovations across a wide variety of drugs the least expensive option. While encouraging growth in
can yield clinical and economic the area of medical technology
value. Drugs in the same to treat acute conditions, it is
therapeutic class differ in their The availability of a broad range also important to see how
therapeutic profile, metabolism, medical innovation can help
adverse effects, dosing schedules, of medicines enables physicians to maintain a commitment to
delivery systems, and other primary and preventive care. We
features. The availability of a treat with precision the individual must continue to use disease
broad range of medicines enables management for chronic
physicians to treat with precision needs of diverse patients and conditions and preventive care,
the individual needs of diverse even if the effects are not as
patients and provides options provides options when the first sensational as those of life-
when the first agent used is saving technologies for acute
either ineffective or not tolerated. agent used is either ineffective or conditions.
In fact, many of the major classes
not tolerated.

29
Wilde, M., Barfield, P. “Fluoxetine: A Pharmacoeconomic Review of Its Use in Depression.” PharmacoEconomics, 1998; 13(5): pp. 543-61.
30
Berndt, E., et al. “The Medical Treatment of Depression, 1991-1996: Productive Inefficiency, Expected Outcome Variations, and Price Indexes.”
NBER Working Paper no. 7816; Berndt, E., et al. “Price Indexes for Acute Phase Treatment of Depression.” Medical Care Output and Productivity,
ed. D. Cutler, E. Berndt.
31
Cutler, D., McClellan, M., 2001.
32
Wertheimer, A., Levy, R., O’Connor, T. 2001.
10 33
Ibid.
 It is also important to note that some drugs may be cost-
effective even though they do not result in actual savings.
In other words, the extra cost associated with the new
drugs might not be fully offset by cost reductions
elsewhere in the health care system, meaning that total
costs increase. But if the extra costs are more than offset
by other benefits, these new drugs will still be cost-
effective. For example, second-generation pharmaceuticals
used in the treatment of diabetes have several advantages
over the first-generation agents in this class. A study of
5,000 Medicaid patients determined that the addition of
the new agents was correlated with an overall
improvement in the outcome of drug therapy and a
corresponding decrease in hospital and nursing home costs
for diabetic patients. Yet, drug expenditures increased for
patients who used the new agents, since these drugs are
more expensive than the first-generation agents. The net
result was that total expenditures were unchanged.
Although overall costs were not reduced, the addition of
these incremental improvements resulted in a higher level
of glycemic control without increasing costs.34 Thus, this
innovation did not lead to total cost savings, but when
benefits are factored in, the use of the second-generation
product is shown to be cost-effective.
34
Ibid.
35
“Cholesterol Pill Linked to Lower Hospital Bills.” New York Times, March 27, 1999.
36
Altman, L. “Cholesterol Fighters Lower Heart Attack Risk, Study Finds.” New York Times, November 14, 2001.
In another example, the Scandinavian Simvastatin
Survival Study found that using the drug simvastatin for
treatment of cardiac patients increased drug spending by
$11 million but reduced hospital admissions by one-third
and hospital costs by $8 million among the 2,221 study
subjects.35 A more recent study of these cholesterol-
lowering drugs established that they reduced the risk of a
heart attack or stroke by one-third. In the world’s largest
study of people at high risk for these conditions,
simvastatin, or Zocor, was shown to be much more
powerful than the popular antioxidant vitamins C, E, and
beta-carotene, previously thought to protect the heart. The
study, conducted by a British team of researchers led by
Dr. Rory Collins of Oxford University, involved 20,000
participants who were followed over five and a half years.
Dr. Collins said that “statins are the new aspirin,” and that
if 10 million high-risk patients started taking statins,
50,000 deaths would be prevented each year.36
11
 Cost Savings versus Cost-Effectiveness
The fact that a drug adds to overall health care costs does not mean that it should not be used. The key issue is
whether the increased costs are justified by the benefits produced by the drug. In the case of statins, discussed on
page 11, it appears that by reducing the number of acute cardiac events, the drug produces quality-of-life benefits
that justify the increase in overall health care costs.

This example illustrates an important distinction — some drugs may actually reduce overall health care costs and
thus produce cost savings. Other drugs may raise overall health care costs while simultaneously producing other
benefits, such as reductions in mortality or enhanced productivity or health status, that are deemed to be “worth”
the additional cost. (A determination of “worth” is usually made by comparing the drug to other potential
interventions and finding that these alternatives produce fewer benefits for the same cost and/or the same benefits at
higher cost.) Both of these types of drugs are said to be “cost-effective”— in other words, cost-effectiveness does not
necessarily imply cost savings. Of course, some drugs may raise costs while producing fewer benefits than alternative
treatments — these drugs are not considered to be cost-effective.

Finally, technology assessment can help avoid the spread

of technology that generates costs exceeding benefits. In
the extreme case, effective technology assessment can
avoid “flat-of-the-curve medicine,” in which treatments
have high costs and virtually no benefits. As explained by
Victor Fuchs, “When assessment catalyzes the
abandonment of interventions whose risks exceed their
health benefits, it can lower the cost of health care
without sacrificing its quality.”37
Single-drug studies, taken as a whole, can shed some
light on, but cannot definitively answer, the more general
question of the overall impact of new drugs. In fact,
researchers recently attempted to address this question
through a meta-analysis of multiple single-drug studies.
Peter Neumann of the Harvard School of Public Health and
several colleagues evaluated 228 published cost-utility
analyses of specific drugs. But their findings, while
informative, are not able to answer the question as to
whether, in general, pharmaceutical innovation and the
increased use of new drugs produces benefits — enhanced
health status, reduced health care costs, and/or enhanced
productivity — that are greater than the incremental costs
of the drugs themselves. Rather, their conclusion is that
“some drugs do save money or are cost-effective, but
these determinations depend critically on the context in
which the drug is used and the intervention with which it
is compared.”38
New Approach: Aggregate
Studies Across All Drugs
Thus, to really understand the overall impact of
pharmaceutical research, including the introduction of new
drugs, we need studies that examine the aggregate impact
of drugs. Fortunately, over the last five years, a growing
body of research has emerged that takes this very
approach.
In this section, we review the evidence suggesting that,
in aggregate, the introduction of new drugs has yielded
substantial increases in health status and economic growth,
along with significant reductions in overall health care costs
that far outweigh any increase in costs from the drugs
themselves. These studies do seem to suggest that new
drugs are “worth it.” The remainder of this section
evaluates each of the key areas of improvement — health
status, overall health care costs, and economic
growth/productivity.
Enhanced Health Status
A number of aggregate studies have shown that the
introduction of new drugs has made a significant
contribution to lowering mortality associated with heart
attacks. A 1997 study, conducted by David Cutler of
Harvard University and the National Bureau of Economic
Research (NBER), Mark McClellan of Stanford University

37
Fuchs, V.R., Garber, A.M. “The New Technology Assessment.” The New England Journal of Medicine, 1990; 323(10): pp. 673-7.
38
Neumann, P., et al. “Are Pharmaceuticals Cost-Effective? A Review of the Evidence,” Health Affairs, 2000; 19(2): pp. 92-109.
12
and NBER, and Joseph Newhouse of Harvard University,
examined the reasons for the 30 percent drop in the
mortality rate from acute myocardial infarctions (AMIs), or
heart attacks, between 1975 and 1995. The authors find
that behavior changes account for relatively little of the
decline. Rather, changes in the medical treatments for the
management of AMIs are responsible for the majority —
55 percent — of the reduction in mortality, with
pharmaceuticals alone being responsible for over one
quarter of the overall reduction, making them the single
most important factor in explaining the decline. Use of
aspirin, thrombolytics, and beta-blockers was singled out as
the major contributor to the reduction in mortality. The
same study found that the typical heart attack victim lived
5 years and 10 months after a heart attack in 1991,
8 months longer than in 1984. This increase in life
expectancy is conservatively valued at $15,000 per person,
significantly greater than the $4,000 increase in the costs
of heart attack treatment during that time period (an
increase driven by greater intensity of services rather than
the price of a given service). Cutler goes on to suggest that
the true “price” of heart attack care has been falling
during this time period, as the quality improvement from
increased longevity alone serves as an effective price
reduction to consumers that more than outweighs any
increase in monetary costs.39

Quality-Adjusting Prices
Within many sectors of the economy, the quality of goods and services increases over time. Perhaps the best
example of this phenomenon is in computers, where the capabilities of most products (e.g., speed, ability to handle
software and Internet applications) have increased dramatically over time, even as prices have fallen. Another example
comes from the automobile industry, where there have been dramatic improvements in recent years, including the
addition of air bags and new features that have led to better fuel efficiency. In these and other industries, it is unfair
to measure price inflation simply by calculating the increase in the retail or wholesale price of the good or service in
question. Rather, some sort of adjustment for quality must be made that will tend to make any calculation of inflation
lower than through the use of a simple year-over-year price comparison.

While the Bureau of Labor Statistics (the entity that calculates wholesale and retail price inflation in the United
States) does attempt to calculate “quality-adjusted” inflation in some sectors of the economy (e.g., apparel, consumer
electronics), it has largely not done so with pharmaceuticals. The primary reason is that such an exercise would require
the ability to understand whether new products within a therapeutic class actually improve outcomes (e.g., increased
longevity, enhanced productivity, better quality of life), and to assign a value to these improvements. Unfortunately, it
is difficult to make such calculations with the precision that might be required for a government inflation adjustment.
But as Cutler’s work suggests, pharmaceuticals and other health care treatments may be leading to improvements in
health care outcomes that, even using conservative estimates of the value of added life-years, are extremely valuable
to society and to individuals. If these gains could be calculated in a rigorous fashion for the industry as a whole, it is
likely that quality adjustments would lead to lower estimates of pharmaceutical price inflation.

39
Cutler, D., McClellan, M., Newhouse, J. “The Costs and Benefits of Intensive Treatment of Cardiovascular Disease.” Conference Paper,
Measuring the Prices of Medical Treatments, American Enterprise Institute/Brookings Institution, December 12, 1997. 13
 A second study by Cutler and Evaluating the Impact of
Srikanth Kadiyala of the National All New Drugs
Bureau of Economic Research
The total economic value to As with the results of the
(NBER) builds on these results by single-drug studies, evaluations
looking at changes in survival
Americans from reductions in of the role of drugs in cardiac
rates after AMIs and strokes. This care — especially specific aspects
study credits medical research —
mortality from cardiovascular of that care such as post-MI
which helps to create new drugs treatment — do not prove that
and treatment protocols — for at
disease between 1970 and 1990 is new drug introductions in the
least a third of the observed aggregate have had a positive
improvement in survival rates,
$1.5 trillion each year. impact on health status. As
with new therapies to reduce Cutler himself noted in his 1997
blood pressure and cholesterol study, “the important question is whether our results
being worth 13 percent on their own.40 In a separate generalize to other types of medical care.”
analysis, Murphy and Topel estimate that the total
economic value to Americans from reductions in mortality Much of the work in examining this very issue has been
from cardiovascular disease between 1970 and 1990 is conducted by Frank R. Lichtenberg of Columbia University
$1.5 trillion each year.41 and the NBER. Lichtenberg analyzes data over the 1960-
1997 period to calculate both the pharmaceutical R&D
Thus, Cutler and Kadiyala’s analysis would suggest that expenditure per life-year gained over this period and the
$500 billion or more of this economic value is the result of medical expenditure per life-year gained. He begins with
medical research that leads to new drugs and treatments; an estimate of the long-run elasticity of longevity with
this figure is 20 times greater than the NIH annual budget. respect to total health expenditures and the corresponding
In fact, the fruits of medical research as measured by the elasticity with respect to pharmaceutical R&D (as indicated
gains from reductions in mortality from cardiovascular by the number of new drugs approved). Evaluating these
disease alone are significantly greater than the cost of all elasticities at the sample mean (e.g., 20.8 new drugs
medical research.42 approved per year) allows the author to calculate the
addition to life expectancy that would occur if just one
In a third study of heart disease, Maria Hunink of the additional drug were approved each year (or
University of Groningen in the Netherlands and Milton correspondingly, the addition to life expectancy from a one
Weinstein of the Harvard School of Public Health find that dollar increase in medical expenditures). He then estimates
nearly three-quarters of the 34 percent decline in mortality the total life-years gained per year from a permanent unit
from coronary heart disease (CHD) that occurred between increase in both new drug approvals and an extra dollar of
1980 and 1990 is due to improvement in the management per capita health expenditure. The next step is to estimate
of patients with diagnosed CHD. (Primary prevention the cost involved in achieving this life-year gain (a figure of
accounted for only one quarter of the decline.) The authors $500 million is used to reflect the cost of obtaining FDA
single out lipid-lowering drugs for patients with high approval of a new drug). Using this methodology,
cholesterol as being especially effective. In fact, Lichtenberg estimates that the pharmaceutical R&D outlay
improvements in low-density and high-density lipoprotein, per life-year gained at $1,345. The corresponding figure
whether through diet or medication, explain a full one- for the cost of medical care per life-year gained is about
third of the decline in mortality.43 $11,000.44

40
Cutler, D., Kadiyala, S. The Economics of Better Health: The Case of Cardiovascular Disease, presented at Lasker Charitable Trust/Funding First,
December 1999 Conference on the Economic Value of America’s Investment in Medical Research.
41
Murphy, K., Topel, R. The Economic Value of Medical Research, Revised, September 1999. Earlier version presented as the Thompson Lecture to
the Midwest Economic Association and in workshops at the World Bank, MIT, University of Chicago, and Boston University.
42
Cutler, D., Kadiyala, S. 1999.
43
Hunink, M., et al. ”The Recent Decline in Mortality from Coronary Heart Disease, 1980-1990. The Effect of Secular Trends in Risk Factors and
Treatment.” Journal of the American Medical Association, 1997; 277(6): pp. 535-542.
44
Lichtenberg, F. Sources of U.S. Longevity Increase: 1960-1997. Working Paper No. 405. December 2000. Center for Economic Studies and Ifo
14 Institute for Economic Research. Munich, Germany.
 The first important finding R&D.45 Figure 5 demonstrates the
from this study is that the cost of
adding life-years to the U.S.
It takes only about one dollar of wide range in the calculation of
the value of a life-year.
population is much less if it is Conservative estimates, like
achieved through the
outlays for new drugs to achieve those of Cutler et al., and our
introduction of new drugs than
if it is done more generally
the same gain in life-years as eight update of this approach to
approximate what the value
through health care outlays. It
takes only about one dollar of
dollars scattered through the health would be in 2000, do not
account for non-market
outlays for new drugs to achieve valuation of life. Estimates such
the same gain in life-years as
care system as a whole. as those by Murphy/Topel
eight dollars scattered through attempt to account for non-
the health care system as a market values, and are thus
whole. Thus, it takes “less buck to get the bang” if the quite a bit larger. No matter which estimate one chooses to
strategy is keyed to new drugs. use, however, the cost-effectiveness of pharmaceutical
innovation is still readily apparent. For example, if the
Second, Lichtenberg juxtaposes his calculations of the figure of $38,000 is substituted for the $150,000 used by
cost of achieving life-year gains with figures pulled from Lichtenberg for the average value of a life-year, the
other research on the benefits of life-years gained. Using a benefits are still 28 times as large as the cost of
figure of $150,000 as the average value of a life-year, “producing” this extra life-year through pharmaceutical
Lichtenberg finds that the benefit-to-cost ratio is 13.6 for innovation.
general medical expenditures and 111.5 for pharmaceutical

Estimating the Value of a Life-Year

The studies cited in this report use alternative approaches for setting the value of a life-year. Some researchers
estimating the economic “output” of an individual use average per capita income (or per capita gross domestic product)
as a proxy for the value of an additional year of life. This methodology is generally considered to be relatively
conservative, as it does not assign a value to benefits outside of a person’s earnings, such as the enjoyment of leisure.
Recent articles by experts on the economics of medical research and technological innovation are using a measure of full
income and full consumption that includes the value of non-market time. They believe that “value of life” calculations
that focus solely on earned income understate the “willingness to pay” for additional life-years. Since many gains in
health and longevity described in this report are concentrated among older people, for whom earnings are typically
lower and non-market time more important, it is particularly important to use a construct for the value of a life-year that
includes both market and non-market time.

Emerging research also shows that medical advances, or breakthroughs in the battle against one disease, may increase
the value of advances against other diseases. This “complementarity” can be illustrated by the fact that if more people
survive heart disease in middle age, or as the “young-old,” there will be more people who stand to benefit from a
breakthrough against Alzheimer’s as more people make it to the “older-old” years. Professors Kevin Murphy and Robert
Topel of the University of Chicago have developed a model for assessing the value of medical research. They find that
changes in health that increase life expectancy by one discounted life-year generate an increase in the value of life of
about $150,000-$200,000 per person.

Source: Murphy, K., Topel, R. The Economic Value of Medical Research, forthcoming.

45
Ibid. 15
 Figure 5
Estimating the Value of a Life-Year
$250,000
$200,000
$200,000

$150,000 $150,000

$100,000

$50,000 $38,000
$25,000
$0
Cutler et al. 2000 GDP Estimate Murphy/Topel

Source: Cutler, D., et al. as cited in Lichtenberg, “Are the Benefits of Newer Drugs Worth Their Cost?
Evidence from the 1996 MEPS, “Health Affairs, 2001; 20(5): pp. 241-51. Author’s estimate based on 2000 GDP
and 2000 Census data; Murphy/Topel, The Economic Value of Medical Research, Revised September 1999.

A second study by Lichtenberg looked at the role of new
drugs across disease types. Evaluating all diseases, patients,
and outpatient drugs, Lichtenberg found that there was a
direct correlation between reductions in mortality within a
particular disease and the number of new drugs used to
treat that disease. These results are controlled for effects
on mortality of other economic/social trends and non-drug
innovations, such as new surgical procedures and vaccines.
Over 45 percent of the variation in mortality across
diseases between 1970 and 1991 is explained by the
extent to which new drugs are used to treat the disease —
making new drug introduction by far the most important
factor in explaining reductions in mortality. In fact, the
reduction in premature death was over five times greater
(72.7 percent versus 13.0 percent) in diseases with the
highest utilization of new drugs than for diseases with the
lowest utilization of new drugs. On average, Lichtenberg
estimates that each of the 436 new drugs introduced
between 1970 and 1991 annually adds 11,200 aggregate
years of life to the U.S. population. Lichtenberg finds that
new drugs appear to have reduced mortality in all age
categories in at least one of the two decades studied. He
also concludes that the “elasticity of mortality” is about
one-half (e.g., a 10 percent increase in new drug approvals
is estimated to reduce mortality by 5 percent).46
International Comparisons of the
Value of Drugs
The work by Cutler, Lichtenberg, and others is primarily
confined to the United States. Relatively little work, in fact,
has been done to evaluate the role of drugs around the
world. H.E. Frech and Richard D. Miller, Jr., however,
conducted one such study for the American Enterprise
Institute. In an evaluation of spending in 21 Organization
of Economic Cooperation and Development (OECD)
countries, Frech and Miller find a significant, positive
relationship between pharmaceutical spending and life
expectancy at age 40 and age 60. The finding is especially
strong at age 60 — they estimate that doubling
pharmaceutical consumption would raise remaining life
expectancy by 2 percent for the average 40-year old and
by 4 percent at age 60. Interestingly, the study found that
non-pharmaceutical health care spending had no effect on
life expectancy at birth, and a slightly negative but
statistically insignificant impact at ages 40 and 60. In other
words, pharmaceutical expenditures tend to prolong life at
ages 40 and 60, but other types of health care
expenditures do not.47
International comparisons such as those made by Frech
and Miller demonstrate that advances in pharmaceutical
treatment and other medical technologies must be
evaluated within the larger context of public health and

46
Lichtenberg, F. Pharmaceutical Innovation, Mortality Reduction, and Economic Growth, presented at the Conference on The Economic Value of
Medical Research, December 1999.
16 47
Frech, H., Miller, D. The Productivity of Health Care and Pharmaceuticals: An International Comparison. Washington, D.C.: AEI Press, 1999.
economic development. Along Comparing
with health care services, the The reduction in premature death Pharmaceutical Benefits
political, social, economic, and Among U.S. Regions
environmental climates of a was over five times greater in While international
nation also influence the overall comparisons are obviously hard
health of the population. In fact, diseases with the highest utilization to make, comparative analysis
echoing earlier work by Aaron of pharmaceutical utilization
Wildavsky,48 Alvin Tarlov notes of new drugs. On average, each of across regions within a country
that economic and public health may yield more reliable or
factors such as clean water, the 436 new drugs introduced robust results. This type of
sanitary housing, and improved analysis can help us infer the
diet have, in the last century, between 1970 and 1991 annually impact of drugs over time from
contributed more to increased life cross-sectional variations within
expectancy than have medical adds 11,200 aggregate years of life national borders.
advances.49 According to Tarlov,
other than penicillin and a few to the U.S. population. Both the value and difficulty
other antibiotics, no single of cross-sectional analysis are
medical advance has had as evident in Pierre-Yves Cremieux, et al.’s attempt to tie
drastic an effect on life expectancy and overall health as pharmaceutical use patterns to infant mortality rates across
have these non-medical factors. regions of the U.S.51 Using multiple regression analysis, the
researchers found that regions with higher overall spending
That said, as countries become more developed, the on pharmaceuticals had lower infant mortality rates than
incremental gains from improvements in public health those that spent fewer dollars on pharmaceuticals. Several
(e.g., cleaner water, more sanitary housing) diminish other factors, including the number of teen pregnancies,
significantly, while gains from medical interventions number of physicians per capita, and low-birth-weight
become relatively more important. In the U.S., for example, prevalence were also found to have a substantial effect on
Penny Mohr and colleagues found that medical infant mortality rates. Variables other than pharmaceutical
interventions, including pharmaceutical treatments, now spending will, of course, have important effects on infant
contribute more to gains in life expectancy than do the mortality, but Cremieux and colleagues observe that “the
types of public health advances that took place during the increase in spending [on pharmaceuticals] observed in the
early and middle part of the twentieth century. Within the United States has been accompanied by a measurable
U.S., the greatest life-saving advances in recent years have effectiveness that translates into lower infant mortality.”
been due to pharmaceuticals. In addition to the already- The authors found that regions that spend more on
mentioned effects of antibiotics, vaccinations have all but pharmaceuticals also tend to be those regions whose
eradicated killer conditions such as diphtheria, whooping health care systems and public health infrastructures are
cough, measles, and polio.50 The importance and cost- more effective at promoting health as measured by infant
effectiveness of these mortality. In other words,
pharmaceutical interventions has pharmaceutical innovation and
been demonstrated clearly over Regions with higher overall the use of pharmaceuticals in
the last century. treatment may, in fact, promote
spending on pharmaceuticals had more efficient and better quality
health systems. These improved
lower infant mortality rates than overall delivery systems lead to
better outcomes such as
those that spent fewer dollars on reduced infant mortality.

pharmaceuticals.

48
Wildavsky, A. “Wealthier is Healthier.” Regulation, 1980; 4(1): pp. 10-2.
49
Tarlov, A. “The Coming Influence of a Social Sciences Perspective on Medical Education.” Academic Medicine, 1992; 67(11): pp.724-30.
50
Mohr, P., et al. The Impact of Medical Technology on the Future of Health Care Costs, February 28, 2001. Project Hope, Bethesda, Maryland.
51
Cremieux, P., et al. “Pharmaceutical Spending and Health Outcomes in the United States.” Reasearch In Human Capital And Development:
Investing in Health: The Social and Economic Benefits of Health Care Innovation, 2001; 14: pp. 59-75.
17
 Improving the Quality of Life
Virtually all of the studies mentioned in this section attempt to estimate the economic value gained through the
extension of life. Yet medical advances, including new drugs, can not only increase longevity, but also may improve quality
of life by enhancing mobility, reducing pain, sharpening mental capacity, and the like. Thus, the estimates of the benefits
created by medical advances included in these studies are likely to significantly understate the true benefits.

Looking Ahead research found in single-drug

Pharmaceutical advances are The cost of treating major
expected to continue to have a
major impact on life expectancy, depression in the U.S.
primarily by further reducing
mortality rates in diseases that percent from 1991 to 1995
today claim many lives. In fact,
four studies by the Battelle of advances in antidepressant
Institute predict disease
patterns in 2015 in the U.S., Germany, France, and the
United Kingdom. They suggest that pharmaceutical
advances will continue to be a major contributor to
reductions in mortality — accounting for 19 to 40 percent
of the projected reduction in mortality from coronary heart
disease, 15 to 40 percent of the reduction in
cerebrovascular disease, 28 to 65 percent in breast cancer,
and 3 to 26 percent in lung cancer. New medical
technologies, including pharmaceuticals, are also expected
to yield economic benefits. In the U.S., these advances are
expected to save $420 billion over a 10-year period. 52
Reductions in Overall Health
Care Costs
As noted previously, a number of studies have suggested
that use of a single new drug can serve to reduce costs in
other parts of the health care system. In many cases, these
studies have found reductions in use of hospital and
emergency services. In some cases, the reductions are
significantly greater than the incremental cost of using the
new drug, yielding a net cost reduction throughout the
system. In other cases, the incremental cost of the drug is
greater than any savings generated elsewhere.
Macro-Analyses of the Impact of New Drugs
on Overall Health Costs
As with evaluations of new drugs on health status,
researchers have recently tried to expand the body of
studies by conducting macro-
analyses of the impact of
fell by 25 pharmaceuticals on overall health
care costs. Some of these studies
because look at the costs of treating a
particular disease. For example, a
drugs. study by NBER found that the cost
of treating major depression in
the U.S. fell by 25 percent from 1991 to 1995 because of
advances in antidepressant drugs.53
Other studies look at the impact of new drugs on overall
health care costs across diseases and conditions. A study by
Lichtenberg evaluated data on the drugs prescribed by
physicians in outpatient visits, by disease, from the 1980
and 1991 National Ambulatory Medical Care Survey Drug
Mentions files produced by the National Center for Health
Statistics. From these data, Lichtenberg found that the
number of hospital days declined most rapidly for those
diagnoses with the greatest increase in the number of
drugs prescribed and the greatest use of new drugs. He
also found that increased drug use was associated with a
lower likelihood of a referral to another physician and a
reduction in inpatient surgical procedures. In fact, his
estimates suggest that each increase of 100 prescriptions is
associated with 16.3 fewer hospital days. He extrapolates
these figures to find that each $1 increase in
pharmaceutical spending yields a $3.65 reduction in
hospital expenditures. Allowing for an expenditure increase
of $1.54 for physicians’ services associated with the
additional pharmaceutical spending still leaves a reduction
of $2.11 for the extra $1 in drug spending. Assuming no
changes in other components of health care spending
(e.g., long-term care), the net gain for $1 in extra drug
spending is $1.11.54 These estimates do not assign any
positive value to the reduction in lost work or leisure time
that accompany the decline in hospitalization. Accounting
for these indirect cost savings would likely substantially
increase the estimated value of pharmaceutical use.55

52
Hall, M. The Impact of Behavioural and Biomedical Advance on Health Trends Over the Next 25 Years. London, UK: Office of Health Economics;
Office of Health Economics Briefing, No. 31. November 1994.
53
National Bureau of Economic Research. Measuring the Prices of Medical Treatments. Washington, D.C. December 1997.
54
Lichtenberg, F. “Do (More and Better) Drugs Keep People Out of Hospitals?” AEA Papers and Proceedings. May 1996; 86(2): pp. 384-88.
18 55
Ibid.
 Lichtenberg also documents drugs. Lichtenberg also finds
the cost-effectiveness of new The use of newer, and generally that the effect of drug vintage
drugs.56 He finds that the use of on health is higher for people
newer, and generally more more expensive, drugs actually with low initial health than it is
expensive, drugs actually for people with better initial
decreases the overall costs of decreases the overall costs of health status. Therefore, in
managing a variety of conditions. contrast to other types of
By decreasing mortality, managing a variety of conditions. technical progress, which tend
decreasing the need for hospital to increase economic inequality,
and other services, and increasing quality of life through pharmaceutical progress has a tendency to reduce
days without diminished functioning, newer drugs more inequality as well as to promote economic growth, broadly
than pay for their extra cost. Using data from the Medical defined.58
Expenditures Panel Survey (MEPS), Lichtenberg finds that
using newer drugs has a statistically significant effect on A cautionary note emerges from a recent paper prepared
reducing the number of days lost from work and lowering for the Health Insurance Association of America and Blue
mortality rates. But the most significant effects he found, Cross and Blue Shield Association by Penny Mohr and her
the ones that taken alone would justify the increased cost colleagues at Project Hope. Mohr assessed the impact of
of new drug prescriptions, were decreased hospital stays new medical technologies on the cost of health care, and
and use of inpatient services. found that new medical technologies, which can include
new drugs, are sometimes over-utilized and therefore drive
The difference in the cost of a prescription between an up health care costs. While these technologies may reduce
“old” drug and a “new” drug in this study could be costs if their use is restricted to an appropriate population,
represented by the difference between a 15-year-old drug they can actually drive up overall costs if they are employed
and a 5.5-year-old drug. Substituting the newer for the in the care of those patients outside the population for
older product would raise the cost of the prescription by whom they have been shown to be medically appropriate
$18. Lichtenberg finds the corresponding reduction in cost and cost-effective.59
to be $56 per hospital stay. The study found not only that
those who use newer drugs spend less time in the hospital Perhaps the best strategy for preventing overuse and
than those using older drugs, but also that their average inappropriate use of pharmaceuticals is to tie utilization of
stay costs less. The use of newer drugs was also associated drugs to best practice research and established clinical
with reduced outpatient department events, office-based guidelines. This strategy is far more likely to result in the
events, emergency department use, and dental care. realization of benefits that outweigh the incremental costs
Combining these effects, Lichtenberg finds that for an $18 of the new drug. Kleinke argues that two factors limit the
increase in cost due to a newer prescription, total health incentives for managed health care plans to use evidence-
care spending is reduced by a little more than $71, or four based criteria in deciding which drugs to pay for: 1) 22
times the added prescription drug costs.57 percent of a plan’s population disenrolls every year, making
it difficult for the plan to recoup its investment in
In a more recent study Lichtenberg finds that people innovative drugs and disease management; and, 2) the
who use newer drugs had better post-treatment health major components of care (and their associated data) are
than people using older drugs for the same condition, even managed by different vendors. He notes that “[t]his
after controlling for variables such as sex, age, race and isolation galvanizes health plans’ perspective that drugs are
income. These people were more likely to survive, their a cost item to be managed, not a health maintenance
perceived health status was higher, and they experienced investment to be leveraged….[The] current hysteria over
fewer limitations on everyday activities. People using newer pharmacy costs suggests that the typical health plan’s
drugs tended to experience a greater increase, or smaller culture remains incapable of taking a ’systems’ view of a
decline, in physical ability than those consuming older line-item cost problem….Expensive drugs are guilty of
driving up total medical costs until proven innocent.”60

56
Lichtenberg, F. “Are the Benefits of Newer Drugs Worth Their Cost? Evidence From the 1996 MEPS.” Health Affairs, 2001; 20(5): pp. 241-51.
57
Ibid.
58
Lichtenberg, F. “Pharmaceutical-Embodied Technical Progress, Longevity, and the Quality of Life: Drugs as ‘Equipment for Your Health.’”
Forthcoming.
59
Mohr, P., et al. The Impact of Medical Technology on the Future of Health Care Costs, February 28, 2001. Project Hope, Bethesda, Maryland.
60
Kleinke, J. “Just What the HMO Ordered: The Paradox of Increasing Drug Costs.” Health Affairs, 2000; 19(2): pp. 78-91.
19
 In a recent article in Health digit premium increases that
Affairs, Kleinke argues that For an $18 increase in cost due to a have occurred in recent years.
progress and increased quality But even more importantly,
will almost certainly drive up the newer prescription, total health care current analyses that take the
cost of medical care: “…medical claims of the insurance industry
progress is expensive…. By spending is reduced by a little more at face value do not take into
contrast — and in sharp conflict account savings in other
with many of the presumptions than $71, or four times the added components that would result
of managed care — bad from the appropriate use of new
medicine is cheap, and bad prescription drug costs. drug therapies. Contrary to
public health even cheaper.”61 popular claims, new drugs and
Pharmaceuticals have been the increased use of drugs for
vilified in the popular media and by insurers as the primary chronic conditions, rather than driving insurers to the brink
culprit in rising health care costs. However, without of financial ruin, would constitute the fulfillment of
breakthrough pharmaceutical innovations, Kleinke believes managed care’s marketing message of increased quality.
that increased life expectancy, declining rates of infant However, to achieve this goal, payers would have to be
mortality and disability among the elderly — which are willing to invest money in drugs that may not pay off in the
falling three times as fast as they did over the previous short term. For an industry that sees better than 20 percent
eight decades — as well as improved management of annual enrollment turnover, and that must justify earnings
chronic and often fatal illnesses would all be impossible. and expenditures quarterly, the long-range perspective,
Though the cost of new drugs is often high, emerging most likely to help patients, is not the same perspective that
research suggests that their use is very often quite cost- will serve stockholders. “Few in health care purchasing
effective. circles will admit the real truth: Rising drug costs are, in
general, part of the solution, not part of the problem,”
Kleinke sees the increased spending on drugs that Kleinke claims.64 But, they can only be part of the solution
manage disease, preclude or delay surgeries, and reduce to control spending, if reimbursement mechanisms are
the use of hospital services as economic, not just medical, based on sound clinical research, and prescriptions are
progress. It “reflect[s] a profound, permanent movement in targeted specifically to those patients who would reap
our health care system away from medical labor and health benefits greater than the increased cost of the drug.
toward medical technology — a belated catching-up of Otherwise, prescription drug expenditures may begin to
health care with the rest of the ‘new economy.’”62 He goes outpace the health and economic benefits they are
on to argue that “[h]igh-price new drugs may be the designed to promote.
cheapest weapon we have in our ongoing struggle against
rising overall medical expenses; unfortunately, we do not
have sufficient data to prove this.”63 While recognizing that
prescription drugs account for a larger percentage of
Increased Economic Growth
health care expenditures (rising from 5.5 percent to 8.5
percent during the 1990s), Kleinke suggests that this
and Productivity
increase is overshadowed by the administrative waste in Even if increased use of new drugs does not generate
our overall health care system. enough savings elsewhere in
the health care system to justify
Noting that insurers have People who use newer drugs had the increased cost of the drugs,
blamed the recent rise in it is still possible that the
premiums on increased drug better post-treatment health than increased expenditures will “pay
spending, Kleinke counters that for themselves” by generating
even a 20 percent increase in a people using older drugs for the economic benefits outside of
component that accounts for only the health care system.
8.5 percent of all spending same condition.
cannot account for the double-

61
Kleinke, J. “The Price of Progress: Prescription Drugs in the Health Care Market.” Health Affairs, 2001; 20(5): pp. 43-60.
62
Ibid, p. 46.
20 63
Ibid, p. 47.
64
Ibid, p. 49.
Stimulating Economic Growth
A number of researchers make the argument that
increased longevity (which, as demonstrated previously, is
in large part due to increased use of pharmaceuticals) plays
a very important role in stimulating economic growth, with
some estimates suggesting that it doubles the rate of
growth in the economy as traditionally measured.
To understand this argument, one must first examine the
impact of longer life spans on the economy. Lichtenberg
argues that increases in life expectancy yield improvements
in the economic well-being of the average person. To
support this view, he notes that the typical person born in
1995 can expect to live 22 years or 41 percent longer than
the average person born in 1920.65 Today’s elderly,
moreover, are in much better health than they were in
previous generations. This means that they are better able
to continue working, if they wish to do so, yielding more
tax revenues; they use less health care, taking some
pressure off Medicare and Medicaid; and they spend more
on other goods and services. In short, enhanced longevity
contributes to economic growth.
Yet the most common measure of long-run economic
growth — growth in annual per capita gross domestic
product or GDP — does not take
into account increases in life
expectancy. William Nordhaus, for Enhanced longevity contributes
one, argues that there is
substantial underestimation of economic
economic growth due to the
failure to account for increased longevity. He estimates that
the growth due to longevity, over the course of the last
century, is about as large as the measured growth in non-
health goods and services. Once adjusted, the rate of
growth, Nordhaus claims, is twice as large as traditional
measures. Murphy and Topel believe that longevity plays a
66
very important role in stimulating economic growth. They
estimate the value of extending life from the perspective of
the “present value” of the extra years of life. Using this
calculation, they find that the value of extensions in life
expectancy has been roughly $57 trillion over a 20-year
period, a figure that roughly equals the gains in
consumption as measured by growth in national income. 67
65
Lichtenberg, F. Pharmaceutical Innovation, Mortality Reduction, and Economic Growth. Presented at the Conference on the Economic Value of
Medical Research, Washington, D.C. December 1999.
66
Nordhaus, W. The Wealth of Nations: Irving Fisher and the Contribution of Improved Longevity to Living Standards. Paper presented at Fisher
Conference, Yale University, May 1998.
67
Murphy, K., Topel, R. The Economic Value of Medical Research, Revised, September 1999. Earlier version presented as the Thompson Lecture to
the Midwest Economic Association and in workshops at the World Bank, MIT, University of Chicago, and Boston University.
68
Nordhaus, W. 1998.
69
Lichtenberg, F. 2001.
Using yet a third methodology, Nordhaus finds that for
every time period since 1900, gains from increased
longevity have been close to (if not above) the gains
generated from growth in national income.68
In short, the economic value of increases in life
expectancy are an important and often forgotten source of
gains in living standards; economic growth adjusted for
longevity may even be double that of more common
measures of economic growth that do not take longevity
into account. And as noted previously, several studies have
come to the conclusion that pharmaceutical innovations
are responsible for a significant portion of the increase in
longevity that has been experienced over the last 20 years.
Enhancing Productivity
Along with boosting economic growth through increased
longevity, pharmaceutical innovation also may have a direct
impact on the economy through reduced absenteeism and
enhanced productivity. Specifically, some researchers have
tested the impact that new drugs have on missed work
days and missed school days. Reducing this “down” time
should have a positive impact on the productivity of
workers and schoolchildren, which should in turn produce
short- and long-term benefits for the economy.
As noted earlier, studies of
to specific drugs, including those
for treating depression and
growth. migraine headaches, have found
meaningful productivity benefits.
But relatively few studies have taken an aggregate view of
the impact of new drugs on the ability to work and time
away from work.
As noted above, Lichtenberg has begun to study the
effect of drug vintage — defined as the year in which the
FDA first approved a drug’s active ingredient — on health.
He has tested the hypothesis that a person’s health is an
increasing function of the average vintage of the drugs he
or she consumes, other things being equal. His initial work
suggests that use of newer drugs reduces work-loss days.69
Additional research in this area is expected to reinforce this
finding.
21
 Putting These Findings Together
Looking at these study findings as a whole, value of this enhanced growth far surpasses the
pharmaceutical innovation and the increased use of new incremental costs of the new drugs that are primarily
drugs provide significant benefits to society, benefits that responsible for creating the increased longevity and
far outweigh the incremental costs of the drugs associated economic growth in the first place.
themselves. In fact, the evidence
would suggest that these costs U.S. policy analysts have
are more than offset by declining Pharmaceutical innovation and the tended to focus almost
costs elsewhere in the health care exclusively on the share of GDP
system, making use of new drugs increased use of new drugs provide going to health care without
justified from the narrow factoring in how health care
perspective of cost savings within significant benefits to society. investments may be driving up
the health care system alone. GDP itself. If health care dollars
are invested wisely in preventive
But new drugs provide even more important benefits health and in new ways to manage chronic illness and
than cost savings elsewhere in the system. Use of new disability, this can “grow the pie.” If such health care
drugs appears to be responsible for significant gains in life investments take a slightly larger share of a substantially
expectancy, which in turn translate into quality-of-life bigger pie, that could turn out to be a good outcome, not
benefits for individual patients and increased economic a bad one. Of course, where money is wasted on
growth for the nation as a whole. Cutler’s work suggests inappropriate or unnecessary care, redundant capacity, or
that factoring quality benefits into the price of health care fraud and abuse, added health care outlays do not pay for
would likely mean that the true themselves through added
quality-adjusted price of medical Use of new drugs appears to be growth and more productivity.
care is declining over time. And The challenge is to target our
even conservative estimates responsible for significant gains in investments toward both basic
suggest that enhanced life medical research and appropriate
expectancy substantially increases life expectancy. technological applications so that
the rate of economic growth in we can get the best “bang for
the nation, with some estimates the buck.”
suggesting that it doubles the rate as traditionally
measured. As various studies make clear, the economic

The challenge is to target our investments

toward both basic medical research and
appropriate technological applications so that we
can get the best “bang for the buck.”

22
New Directions for Policy
1015 18th Street, NW, Suite 210
Washington, D.C. 20036
Phone: 202.833.8877
Web: www.ndpolicy.com