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A Comprehensive Framework
Jack A. Meyer, Ph.D.
President, New Directions for Policy
About the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i
About New Directionsfor Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ii
Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Key Factsand 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: Focuson Health Statusand Health Care Spending . . . . . . . . . . . . . . . . . . . . . . . . .8
Analysesof New Technologiesand Innovationsin Pharmaceuticals: Health and Economic Effects . . . . . . . . . . . . . . . . .9
New Approach: Aggregate StudiesAcrossAll Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Enhanced Health Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Evaluating the Impact of All New Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
International Comparisonsof the Value of Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Comparing Pharmaceutical BenefitsAmong U.S. Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Looking Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Reductionsin Overall Health Care Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
M acro-Analysesof the Impact of New Drugson Overall Health Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Increased Economic Growth and Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Stimulating Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Enhancing Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Putting These FindingsTogether . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
© February, 2002. New Directionsfor Policy
Table of Contents
Jack A. Meyer, Ph.D., isthe founder and president of New Directionsfor Policy. Dr. M eyer hasconducted policy analyses
and directed research on health care issuesfor several major foundationsaswell asfederal and state government and the
businesssector. He hasled projectsdeveloping policy optionsfor reforming the overall health care system and directed
research on employers’ innovationsin health care purchasing. M any of these projectshave highlighted new strategiesfor
extending health insurance coverage to the uninsured. Dr. M eyer isthe author of numerousbooks, monographs, and
articleson topicsincluding health care, welfare reform, and policiesto reduce poverty.
About New Directions for Policy
New Directions for Policy (NDP) isa Washington-based organization that assistspurchasersand providersof health care,
and government through policy research and analysis, strategic planning, and program evaluation. NDP’spurposesare 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 analyzesthe forcesdriving health care spending, designsinnovative strategiesto
improve financing and delivery systems, and evaluatesreformsto extend health coverage to the uninsured.
The author would like to thank Larry Stepnick and Todd Kutyla for their valuable assistance in preparing thisreport.
Richard Levy of the National Pharmaceutical Council offered helpful advice throughout the project.
Thispaper wasproduced under a grant from the National Pharmaceutical Council (www.npcnow.org).
he key finding in thisreport isthat new drugsare
yielding a wide range of benefitsto our society that
more than justify the investment needed to
produce them. Thisreport developsa comprehensive
framework for assessing the value of pharmaceutical
innovation that encompassesboth the cost of bringing
new productsto market and the direct and indirect
benefits. These benefitsinclude improved patient health,
cost reductionsin the health care system, and a more
productive, higher-growth economy. New Directionsfor
Policy reviewed numerousstudies— most of them
conducted during the last few years— and synthesized
and assessed the resultsand conclusionsfrom 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, showsa very large payback on the investments
in new drugs. Benefit-cost ratiosthat 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
excessof 100 to 1.
• The number of hospital daysdeclined most rapidly for
diagnoseswith the greatest increase in the number of
drugsprescribed and the greatest use of new drugs.
The drop in outlaysfor hospital care ismore than three
timesthe value of the associated increase in
• Changesin the medical treatment of heart attacksare
responsible for 55 percent of the 30 percent decline in
mortality associated with heart attacksthat occurred
over a twenty-year period. Pharmaceuticalsalone 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 hashad a major positive
impact on U.S. economic growth. Pharmaceutical
innovation hascontributed to the gain in life
expectancy, and hastherefore helped strengthen our
• M ost of the increase in pharmaceutical spending that
hasoccurred in recent yearsisattributed to increasesin
the volume of drugstaken by patients. Inflation in the
pricesof existing drugsaccountsfor only a very small
proportion of the increase, and in some cases, has
made no contribution to rising outlaysfor drugs. The
price effect associated with the introduction of new
drugshasalso made a relatively small contribution to
the total spending increase.
• Volume increasesare comprised of a greater
proportion of people in the population who are using
pharmaceuticals, more prescriptionsper person, and
more daysof use per prescription. The use of
pharmaceuticalsto treat asthma illustratesthe way
these componentsof 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-fourthsof all deaths
in the U.S. Similarly, a few chronic conditionssuch as
asthma, hypertension, and diabetesaccount for a very
large share of total health care spending.
Pharmaceuticalscan be an integral part of disease
management programsthat help patientscontrol their
symptoms, reduce the incidence of flare-ups, and lead
healthy and productive lives.
he purpose of this
report isto develop a
new framework for
assessing the impact of
on health status, health
expenditures, and our
economy. The goal isto
develop a comprehensive
approach to analyzing both
the costsand benefitsof
in order to determine
whether society isgetting a
good return on its
investment in new drugs.
The current debate ismuch too narrow. It focuses
mainly on the cost of drugsand largely ignoresthe
benefits. When benefitsare included in the analysis, they
are measured quite restrictively. The question most
frequently asked under the “ conventional wisdom” is,
“ Do drugscost too much?” But thisisa hard question to
answer in a vacuum — outlaysfor drugsmust be assessed
in termsof what benefitsthey produce. The framework
developed here looksat outlaysfor drugsasa social
investment and therefore seeksto determine the return
that such an investment yields, and whether the return
An appropriate framework for evaluating the yield on
investmentsin new drugswould include a comparison of
outlaysfor drug innovation with the following typesof
benefits. First, to the extent that new pharmaceuticals
improve patients’ health, there will be savingswithin the
health care system. For example, if the introduction of
new productshelpspatientsto fully recover from acute
care episodesand/or manage chronic illnessesso that they
have fewer flare-upsand complications, there will be
savingsin the form of fewer visitsto the emergency room,
fewer or shorter staysin the hospital, and lessphysician
care. If a new, more expensive drug replacesan older
drug, but that new drug improvesmedical management
of diseasesand chronic illnesses, the savingsneed to be
juxtaposed with the extra cost. A new drug, for example,
may be more effective in improving a medical condition,
have a dosage schedule that
compliance (e.g., once a day
versusfour timesa day), or
have fewer side effects.
Each of these characteristics
could yield better health
throughout the health care
R& D may help patientsbe
more active and productive.
Thiscould yield benefits
outside the health care
system. These benefitsmight take the form of reduced
absenteeism from work, greater labor productivity, and
lower employee turnover. These benefitswould be
realized by employersand employeesin the form of
higher profitsand higher wages.
Third, pharmaceutical innovation helpspeople live
longer. Added yearsof life generate both costsand
benefitsfor society. On balance, thisreport will show
that the benefitsof pharmaceutical innovation outweigh
The effectsof an aging population will reach a “ take-
off” stage at the end of thisdecade asthe baby-boom
generation enterstheir retirement years. The number of
workerssupporting each retiree will fall from more than
three to about two over the next 20 to 30 years. As
documented below, chronic illnesseshave become far
more important in the overall health care picture than
used to be the case. Asdemographic trendsunfold
against thisbackdrop, the critical challenge for our society
will be to find effective waysof managing chronic illness
and helping elderly people with disabilitiesstay active and
remain in the community. Thisinvolvesdeveloping
alternativesto traditional institutional care. Finding ways
to help older workersremain on the job, or return to
work following a complication of a medical condition, will
also take on great importance.
Yield on Society’s Investment in New Drugs
• Savingswithin the health care system
• Savingsoutside the health care system
• Savingsfrom added yearsof life
A new drug may be more effective in
improving a medical condition, have a
dosage schedule that facilitates better
patient compliance, or have fewer side
effects. Each of these characteristics could
yield better health outcomes and savings
throughout the health care system.
Pharmaceuticalswill be a key component of disease
management programs, particularly in the case of chronic
illnessand disability. In assessing their value, it will be
important to adopt a framework that accountsfor such
key outcomesasliving longer, working productively, and
managing disabilitiesso that individualscan remain active
and independent. Pharmaceuticalshave the potential to
contribute to a lower “ dependency ratio” by maintaining a
larger pool of working people and by helping non-workers
Thisreport broadensthe framework for assessing the
value of pharmaceuticalsto include the full range of
potential benefitsfrom pharmaceutical innovation. It
addressesthe following questions:
1. What isthe overall impact of pharmaceutical innovation
on the health and functional statusof our population?
2. What isthe effect of thisinnovation on life expectancy?
3. What isthe effect on
health care spending?
4. What isthe effect on the
economy, including such
from work and labor
These issuesrarely enter the public debate about the
value of pharmaceuticals. Yet, they may be crucial to a
determination of the cost-effectivenessof innovation in this
field. Thisreport discardsthe narrow discussion about
whether particular drug pricesare “ too high” and focuses
instead on the more comprehensive question of whether
investmentsin pharmaceutical research and innovation
have a positive payoff for society. The answer to this
question requiresan objective review of the costsand
benefits(both direct and indirect) of thisoutlay.
The development of a comprehensive and long-term
perspective for evaluating drug innovation ischallenged by
the fact that third-party payersfrequently face very short-
term, tight budget constraints. Thismakesit difficult for
them to factor in potential savingsthat may occur outside
of the pharmacy budget over extended periodsof time.
Statespurchasing drugsunder M edicaid, HM Os, and
hospitalsnot only work within tight budgets, but also
frequently examine each component of the health care
budget within “ closed
bins” that ignore cross-
sector spillover effects. This
may fail to capture some
key sourcesof savingsand
In assessing [the value of
pharmaceuticals], it will be important to
adopt a framework that accounts for such
important outcomes as living longer,
working productively, and managing
disabilities so that individuals can remain
active and independent.
Key Facts and Trends
Outpatient pharmaceutical spending in the U.S. totaled
$117 billion in 2000, or about 1.2 percent of our gross
Outpatient drugsaccounted for about 9
percent of the health care dollar in 2000. Drug spending
increaseshave outpaced spending on other health care
servicesin recent years(e.g., there wasa 16.9 percent
increase in drugsin 1999 compared with a 3.7 percent
increase for hospital care and a 6.0 percent increase for
Drugsare the most research-intensive
industry in the U.S. Asshown in Figure 1, R& D asa percent
of salesamountsto 17.0 percent in domestic research-
based pharmaceuticals(15.6 percent in global research-
based pharmaceuticals). The former figure isabout two-
thirdshigher than the corresponding proportion in
computer software, more than three timeshigher than in
telecommunications, and more than four timesthe average
for all U.S. industries(excluding drugsand medicine).
Research Intensity of Various Industries, 2000
Industrial Sector R&D as a % of Sales
Research-based pharmaceutical companies
Domestic R& D 17.0%
Global R& D 15.6%
Industrial Sector Comparison
Drugs& M edicine
Computer Software & Services 10.5%
Electrical & Electronics 8.4%
Aerospace & Defense 3.8%
All industriesexcluding “ Drugs& M edicine” 3.9%
“ Research-based pharmaceutical companies” based on ethical pharmaceutical salesand ethical
pharmaceutical R& D only, astabulated by PhRM A.
Standard and Poor’sCompustat – 4 digit SIC Codes.
“ Drugsand M edicine” based on total R& D and salesfor companiesclassified within the “ Drugs&
M edicine” sector, astabulated by Standard & Poor’sCompustat (includesboth research-based and non-research-
Source: PhRM A, Pharmaceutical Industry Profile 2001, Figure 2-3, based on PhRM A calculationsand
Standard and Poor’sCompustat.
A recent study by Duboisand colleaguesdisaggregated
the overall trend in drug spending. They concluded that
price inflation for existing drugswasjust one of six factors
— and for most therapeutic categoriesthe least important
factor — explaining the increase.
The factorsare listed
1. Growing prevalence of identified and treated medical
2. Demographic shiftstoward an older population;
3. Changesin the mix of existing therapiestoward more
4. Increased quantity of drugsper patient;
5. Introduction of new therapeutic agents; and
6. Inflation of existing product prices.
Data from the Center for M edicare and M edicaid Services, “ National Health Care ExpendituresProjections(2000-2001).”
Dubois, R. et al. “ Explaining Drug Spending Trends: DoesPerception M atch Reality?” Health Affairs, 2000; 19(2): pp. 231-9.
VolumeAccounts for Much of theSpending Changes
for Categories of Drugs
Total % Change in Spending
Price Factors Volume Factors for DrugsTreating Condition
Asthma 11 83 94
Hormone Replacement 63 156 219
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 analysesuse data from 1995 and 1998; all other categoriesuse data from 1994 and 1997.
Source: Dubois, R. et al. “ Explaining Drug Spending Trends: DoesPerception M atch Reality?” Health Affairs, 2000; 19(2): pp. 231-9.
The study by Duboisand colleaguesillustrateshow
volume increasesmay be linked to improved preventive
care. Asshown in Figure 2, price factorsaccounted for 11
percentage pointsof the total growth in asthma spending,
while volume factorsaccounted for 83 percentage points.
The number of patientsbeing treated for asthma
increased, and the use per patient rose aswell. For
example, the increase in the number of asthma patients
being treated accounted for about a quarter of the
spending growth. In addition, the
proportion of patientswith asthma
who used at least one prescription for
inhaled corticosteroidsincreased from
24 percent to 40 percent over this
period. The percent of patientsusing
three or more canistersof medication
during a year’stime doubled, from 9
percent to 19 percent.
Thisincrease in pharmaceutical management of asthma
wasassociated with a decline in asthma-related hospital
admissions. While it isdifficult to establish cause-and-effect
with certainty, hospital admissionsby patientswith asthma
declined by 35 per 1, 000 patientsover the period and
emergency room visitsdeclined by 31 per 1, 000 patients.
These savingshelped to offset the increase in spending for
asthma drugs. The increasesin overall spending for
pharmaceuticalsto treat asthma suggest not that there is
a problem with increased drug prices,
but that increased volume due to
appropriate disease management is
driving spending and leading to
better preventive care. Thisexample,
then, also illustratesthe type of
benefitsand cost savingsthat can be
realized when one looksat drug
spending increasesin a broader
Increased volume due to
management is driving
spending and leading to
better preventive care.
Examining trendsover several categoriesof drugsfor a
three-year period, the authorsfound that “ although the
average transaction price rose in every case but one, the
impact on the rise in drug spending wasgreatly 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 agentsand lipid-lowering drugs.”
Figure 2 showsthat for several disease and product
categories, the effect of volume factorson spending
increasesgreatly exceeded price factors. In the case of
antidepressants, for example, the overall increase in
spending over a three-year period was85 percent,
comprised mostly of the variouscomponentsof volume
effects. The price inflation of existing productsonly
accounted for 7 percentage pointsof the 85 percent
increase, and the price impact of the introduction of new
productsaccounted for only 2 percentage points.
Importanceof Chronic Illness
An estimated 125 million Americanssuffered from
chronic illnessin 2000, 20 million more than the
number forecast for thisyear in 1996. Thisfigure is
projected to reach 157 million in 2020, when one in
four Americanswill be living with multiple chronic
In 2000, medical costsfor people with
chronic conditionstotaled $774 billion. A person with
a chronic condition has, on average, medical
expendituresof $6, 032 per year ($16, 245 if the
person also hasa functional limitation). These figures
compare to outlaysof only $1, 105 for a person in
Compared to people suffering only from
acute health episodes, the annual medical costsper
person were more than double for people with one
chronic condition, and almost six timeshigher 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-fourthsof all U.S. deaths. Pharmaceutical
productsplay an important role in the treatment and
management of each of these four conditions. M any
individualssuffering from these chronic conditionsare
among the top 1 percent of patientswhose health
care outlaysaccount for 30 percent of all health care
spending, while the bottom 50 percent of patients
generate combined outlaysthat account for only 3
percent of spending.
Thisdisparity in spending calls
for the placement of a high priority and the
concentration of considerable effort on determining
better waysto manage the illnessesand chronic
conditionsof the relatively small segment of the
population who are critically and/or chronically ill.
We have much work to do in thisarea. A study by
Shuster and colleaguesfound that only 60 percent of
patientsreceived recommended care for chronic illness
while 20 percent received contraindicated care.
Despite the progressnoted above, only 27 percent of
patientswith asthma receive an inhaled anti-
inflammatory drug to control symptoms.
women over 50 yearsof age, 38 percent had not
received a mammogram in the preceding 18 months.
M ore than half (54 percent) of M edicare patientswith
diabetesdid not receive an eye exam by an
ophthalmologist during a year’stime, and 84 percent
did not receive a Hemoglobin A1c exam — both
standard practice in avoiding complicationsof
TheAging of thePopulation
The U.S. isfacing an aging population. The number
of people aged 65 and over isexpected to rise from
about 36 million today to about 70 million in 2030.
The fastest growing segment of thisgroup is
comprised of people 85 yearsof age and older. Their
share of the total population isprojected 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 hasheld that thistrend
will lead to a large increase in health care spending
and a gloomy outlook for the financial stability of the
M edicare program. Indeed, the elderly do use
considerably more health services— including drugs
— than do the nonelderly. For example, people 65 to
74 yearsof age use four timesasmany prescriptions
asthose who are between the agesof 19 and 44.
Wertheimer, A., O’ Connor, T., Levy, R. The Value of Incremental Pharmaceutical Innovation for Older Americans. Philadelphia: Temple
Alliance for Health Reform Issue Brief, America’s Most Ignored Health Problem: Caring for the Chronically Ill, June 2001.
Institute of M edicine, Crossing the Quality Chasm. Washington, D.C. 2001.
Shuster, M ., M cGlynn, E., Brook, R. “ How Good isthe Quality of Health Care in the United States?” Milbank Quarterly, December
1998; 76(4): pp. 517-563.
Ozminkowski, et al. “ Cost Implicationsfor the Use of Inhaled Anti-Inflammatory M edicationsin the Treatment of Asthma.”
PharmacoEconomics, September 2000; 18(3): pp. 253-64.
Stoner, T., et al. “ Do VouchersImprove Breast Cancer Screening Rates? Resultsfrom a Randomized Trial.” Health Services Research,
1998; 33(1): pp. 11-28.
Weiner, J., et al. “ Variation in Office-Based Quality: A Claims-Based Profile of Care Provided to M edicare PatientsWith Diabetes.”
Journal of the American Medical Association, 1995; 273(19): pp. 1503-8.
Neuman, T. Improving Prescription Drug Coverage: Opportunities and Challenges for Reform(Testimony
before the Senate Finance Committee), Henry J. Kaiser Family Foundation, M arch 2001.
An Aging Population Will Put MorePressure
on theHealth CareSystem
Going forward, seniorswill continue
to use more health resourcesthan will
the younger population. But the key
to making our social insurance
systemsviable and controlling overall
health spending hingeson trendsin
disability, functional limitations, and
most important, ratesof
institutionalization. New evidence suggeststhat the gloomy
forecastsmay need to be revised if recent trendsin the
incidence of disability continue. A 2001 study by Kenneth
M anton and XiLiang Gu found an acceleration in the
decline in chronic disability over the last two decades. From
1988 to 1989, the incidence of disability among the elderly
declined 0.26 percent per year; from 1989 to 1994, the
reduction was0.38 percent per year; and from 1994 to
1999, it was0.56 percent per year (see Figure 4).
statisticsare reinforced by new findingsreported by David
Cutler, who concludesthat several measuresof disability —
including overall health, institutionalization, dependency
rates, and functional impairment — are improving for the
elderly. For example, whereas25 percent of the elderly
were dependent in 1984 (asmeasured by ability to perform
activitiesof daily living), only 19 percent were dependent in
1999. One survey of functional impairment found a rapid
decline of 3.2 percent per year.
Cutler also notesthat there wasa
sharp increase in the use of
nonsteroidal anti-inflammatory drugs
over the past three decades, and
suggeststhat thiscould account for
why disability for personswith
arthritishasfallen so dramatically in
recent years. Similarly, he observes
the connection between the marked rise in
antihypertension medication in the 1970sand early 1980s
and the decline in the incidence of strokesin recent
M anton and Gu also found a substantial
reduction in the use of institutional care among the elderly.
The proportion of those 65 yearsof age and older that
were in an institution fell from 6.8 percent in 1982 to 6.1
percent in 1989, and to 4.2 percent in 1999 (Figure 4). The
study found that there were 400, 000 fewer nursing home
staysin 1999 than there would have been had the 1994
prevalence of disability persisted. Since nursing homesare
so much more costly than other living arrangements, this
reduction translatesinto savingsof $18.9 billion. The
authorsalso found that the decline in the incidence of
disability islarge enough to make a major difference in the
prospectsfor the M edicare Trust Fund. They conclude that
the relative rate of improvement from 1994 to 1999 was
considerably faster than the rate needed to preserve
M edicare solvency through 2070.
2000 2010 2020 2030 2040 2050
% pop. over 65
% pop. over 85
Source: U.S. CensusBureau Projections.
M anton, K., Gu, X. “ Change in the Prevalence of Chronic Disability in the United StatesBlack and Non-Black Population Above Age
65, 1982-1999.” Proceedings of the National Academy of Sciences, 2001; 98(11): pp. 6354-9.
Cutler, D. “ Declining Disability Among the Elderly.” Health Affairs, 2001; 20(6): pp. 11-27.
M anton, K., Gu, X. 2001.
Reduction [in nursing
home stays] translates into
savings of $18.9 billion.
Declinein Disability and Institutionalization of theElderly
Average annual decline in incidence of disability
Proportion of elderly in an institution
Source: M anton & Gu, 2001.
According to studiesby M anton
and Pardes, declinesin disability
ratesare consistent with the
introduction of new pharmaceutical
technologiesdue to the maturation
of major areasof biomedical
research (for example, osteoporosis,
stroke, Parkinson’sdisease, and
congestive heart failure).
cited the use of hormone
replacement therapy, which has
increased steadily since 1982, asan example. Over 10
million women are now taking thistherapy, which
substantially reducesthe incidence of osteoporosis, a major
cause of disability in older women. If these trends
continue, the key challenge in the new century will be to
manage the illnessesof seniorsliving in the community —
at home, with relatives, or in assisted
living facilities— aswell asnonelderly
adultsand children with chronic
illnessesand functional impairments.
These will be the “ high-cost users”
who fill emergency roomsand
comprise a large share of hospital
stays. In many cases, their institutional
care can be avoided or shortened
through appropriate disease
management. Prescription drugsare
an important element of thisstrategy. In evaluating how
pharmaceuticalscontribute to disease management for
chronically or critically ill patients, it isimportant to
understand the costsand benefitsof pharmaceutical
The proportion of those 65
years of age and older that
were in an institution fell
from 6.8 percent in 1982 to
6.1 percent in 1989, and to
4.2 percent in 1999.
PardesH., et al. “ Effectsof M edical Research on Health Care and the Economy.” Science, 1999; 283(5398): pp. 36-43.
TheEvidenceon theImpact of
Thissection reviewsresearch findingson the impact of
pharmaceutical R& D and the use of new drugson health
status, overall health care expenditures, and the economy.
It beginswith a brief review of the more conventional
approach to thisresearch — studiesthat evaluate the
impact individual drugsor classesof drugshave on health
statusand spending to treat specific conditions. It then
highlightsfindingsfrom studiesthat examine the broader
health and economic effectsof specific medical
innovations. Finally, thisreview looksat a relatively new
approach to research — one that evaluatesfrom an
aggregate perspective the impact of all new drugs.
Traditional Approach to Research:
Focuson Health Statusand Health
M uch of the research on the impact of drugshighlights
the benefitsof individual drugsor classesof drugsfor
specific medical conditions. Working within this
framework, researchershave found that many drugs
appear to be quite effective in enhancing health statusand
reducing costs. For example, studieshave found that
specific typesof drugshave been able to enhance health
statuswhile simultaneously reducing health care costs:
• Use of angiotensin-converting enzyme (ACE) inhibitors
hasbeen shown to reduce mortality by 16 percent in
patientswith congestive heart failure. The same study
documented a $9, 000 reduction in per-patient hospital
costsover a three-year period.
• In a study examining treatmentsfor congestive heart
failure, Humana Hospitalsfound that a year-long disease
management program for roughly 1, 100 patientswith
congestive heart failure resulted in a net $9.3 million
reduction in health care costs. Thisdisease management
program also enhanced patients’ ability to perform
activitiesof 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
costsjumped by 60 percent, but these increased
expenditureswere more than offset by a 78 percent
decline in hospital costs.
• New drugshave helped reduce the mortality rate for
AIDS and HIV patientssignificantly, while simultaneously
reducing the need for hospitalization. One study found
that providing patientswith full accessto new AIDS
drugssaved the Department of VeteransAffairs$18
million in treatment costs.
• 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 strokeseach
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
• Patientstreated with beta-blocker drugsafter a heart
attack are 40 percent lesslikely to die in the two-year
period following the heart attack than are heart attack
victimswho do not receive these drugs.
Other studieshave also documented cost reductions
associated with the use of specific drugs. For example, a
study sponsored by the National Institutesof Health (NIH)
found that prompt use of tissue plasminogen activator
(t-PA) reduced the costsof treating a stroke patient by an
average of $4, 400 by reducing the need for
hospitalization, rehabilitation, and nursing home care.
Greater use of thismedicine could save the health care
system more than $100 million a year.
The SOLVD Investigators. “ Effect of Enalapril on Survival in Patientswith Reduced Left Ventricular Ejection Fractionsand Congestive Heart
Failure.” New England Journal of Medicine, 1991; 325(5): pp. 293-302.
“ Provide Education about Congestive Heart Failure and Pump Up Your Savings, ” Managed Healthcare, 1998; 8(4).
Rahman, A., et al. “ Inversion of Inpatient/Outpatient HIV Service Utilization: Impact of Improved Therapies, Clinician Education, and Case
M anagement in the U.S. Department of VeteransAffairs.” F.D.C. Reports, July 20, 1998.
M atchar, D., et al. Secondary and Tertiary Prevention of Stroke Patient Outcomes Research Team(PORT) Final Report – Phase I, AHRQ Pub. No.
00-N001, Rockville, M D: Agency for Healthcare Research and Quality, June 2000.
Gottlieb, et al. “ Effect of Beta-Blockade on M ortality among High-Risk and Low-Risk Patientsafter M yocardial Infarction, ” The New England
Journal of Medicine, 1998; 339(8): pp. 489-497; Levy, R. “ What to Tell PatientsAbout the Cost-Benefit of M edications, ” Wellcome Trends in
Pharmacy, January 1993.
Fagan, S., et al. “ Cost-effectivenessof Tissue Plasminogen Activator for Acute Ischemic Stroke. NINDS rt-PA Stroke Study Group, ” Neurology,
1998; 50(4):883-90; National Institutesof Health, National Institute of Neurological Disordersand Stroke. New Stroke Treatment Likely to
Decrease Health Care Costs and Increase Quality of Life. NewsRelease, April 22, 1998.
A recent review of a seriesof incremental pharmaceutical
innovationsshowsimportant benefitsacrossa number of
different diseasesand chronic medical conditions.
Incremental, small changesin dosage form, formulation, or
molecular configuration of pioneer compoundsprovide the
following benefits: 1) fewer side effects; 2) improved drug
safety and effectiveness; 3) greater ease of use, increasing
compliance; and 4) treatmentsbetter tailored to individual
Other benefitsaccrue when new clinical
usesof existing medicationsare discovered.
Analysesof New Technologiesand
Health and Economic Effects
Bringing patientsback to good health hasbeneficial
effectsthat extend beyond the health care system. Some
studieshave found that drugscontribute to greater
productivity, primarily by reducing lost school and work days.
• M edical costsdeclined by $822 per employee per year
and absenteeism dropped by nine dayswhen depressed
workerswere treated with a range of anti-depressant
medicines. Savingsfrom improved productivity and the
reduction in work lossand medical costsfar outweighed
the cost of drug treatment.
• 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.
However, benefitsof medical innovationscan be
examined even more broadly, encompassing the valuesof
longer and improved quality of life. In a recent study, David
Cutler and M ark M cClellan present findingsof a very large
payback from new technology in medicine.
In four out of
five conditionsthey analyzed — heart attack, low birth-
weight, depression, and cataracts— Cutler and M cClellan
find the estimated benefit of technological change to be
much greater than the cost. In the case of breast cancer
treatment, the costsand the benefitswere found to be
roughly equal. The authorsclaim that “ [t]he benefitsfrom
lower infant mortality and better treatment of heart
attackshave been sufficiently great that they alone are
about equal to the entire cost increase for medical care
Though the costsof treating both heart attack victims
and low-birth-weight babieshave increased considerably
over the last few decades, the life-yearsadded from more
aggressive treatment using advanced technologies,
including drugsto control blood pressure and cholesterol
levels, more than make up for that cost. Cutler and
M cClellan 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 assessthe net gain realized from
those life-years, the authorsalso consider the cost of future
medical care, given that an individual will now live longer,
and asa result, will likely use more medical resourcesin
those added years.
To analyze the benefitsof new technology in heart
attack patients, the authorsuse M edicare claimsdata.
Since most elderly and disabled heart attack survivorsdo
not work after the attack, the authorsassume that there
are no productivity benefitsfrom 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). Thisyieldsa figure of $70, 000 for the net
present value of technological innovation. In contrast the
costsof treatment increased about $10, 000. Therefore, the
net gain of technological advancesin the treatment of
heart attacksfrom 1984 to 1998 isabout $60, 000 per
heart attack ($70, 000 in benefitsversus$10, 000 in
Analyzing data on low-birth-weight babies, David Cutler
and Ellen M eara found that the treatment costsincreased
sharply over the 1950 to 1990 period, primarily because
there waslittle that could be done for these infantsa half
century ago. With special ventilatorsand other new
technology, the present value of lifetime treatment cost per
child rose to $40, 000 by 1990. The authorsincorporate the
fact that babiessurviving will both work (unlessthey are
disabled, which wasaccounted for in the analysis) and
consume resources. Netting out the offsetting forces
(contributionsto growth and productivity from work, on
the plusside, and medical resourcesconsumed, on the
minusside), they find that the ratio of benefitsto costsisa
startling 6 to 1, or $200, 000 per low-birth-weight infant.
Wertheimer, A., Levy, R., O’ Conner, T. “ Too M any 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.
Rizzo, J., et al. “ Labor Productivity Effectsof Prescribed M edicinesfor Chronically Ill Workers, ” Health Economics, 1996; 5(3): pp. 249-65.
Legg, R., et al. “ Cost-effectivenessof Sumatriptan in a M anaged Care Population,” American Journal of Managed Care, 1997; 3(1): pp. 117-22.
Cutler, D., M cClellan, M . “ IsTechnological Change In M edicine Worth It?” Health Affairs, 2001; 20(5): pp. 11-29.
Cutler, D., M eara, E. “ The Technology of Birth: IsIt Worth It?” Frontiers in Health Policy Research. vol. 3, ed. A. Garber. Cambridge, M A: M IT
New drugsto treat depression have also been shown to
be cost-effective when a comprehensive framework for
measuring costsand benefitsisadopted. Treatment with
fluoxetine, a selective serotonin reuptake inhibitor (SSRI)
wasfound to involve total direct health care costsof
$1, 970 over a six-month period. Treatment with
imipramine and desipramine, two older products(tricyclics),
involved costsof $2, 100 and $2, 400, respectively.
Furthermore, SSRIshave fewer side effectsand a greater
likelihood that patientswill comply with the course of
treatment. Thismeansthat in addition to having somewhat
lower direct costs, SSRIswill yield greater offsetsto cost in
the form of lower co-morbidity, lower ratesof
hospitalization, and simplified follow-up outpatient care.
A similar study by Professor Ernst Berndt found that the
shift from psychotherapy and tricyclic medications(older
technology) to selective serotonin reuptake inhibitors
(SSRIs) wasaccomplished at virtually no net cost.
Furthermore, SSRIshave lower “ drop-out rates” and fewer
side effectsthan other drugs, and they cost patientsless
than psychotherapy. Berndt and colleaguesfound that this
treatment substitution wasable to control the symptoms
(i.e., achieve remission) of mental illnessfor about 20
percent lessin outlays.
Drawing upon research findingsin
the literature, Cutler and M cClellan estimate that the
overall value of spending lesstime depressed ismore than
six timesthe cost of treating depression.
A new study by Wertheimer, Levy, and O’ Conner shows
that incremental innovationsacrossa wide variety of drugs
can yield clinical and economic
value. Drugsin the same
therapeutic classdiffer in their
therapeutic profile, metabolism,
adverse effects, dosing schedules,
delivery systems, and other
features. The availability of a
broad range of medicinesenables
physiciansto treat with precision
the individual needsof diverse
when the first agent used is
either ineffective or not tolerated.
In fact, many of the major classes
of drugsin current use owe their overall therapeutic
effectivenessand clinical significance to important
modificationsin the first generation of drugs.
example, third-generation antihistamines, developed from
the active ingredientsof the second-generation agents,
retain the activity of the parent compound but with
improved tolerability, improved pharmacokinetics, fewer
side effects, and greater safety. In another example,
cephalosporin antibioticsare now available in four
generationsof agents, each providing certain benefitsthat
might be missing in the prior version. Fourth-generation
agents, for example, have broad-spectrum gram-negative
and gram-positive activity comparable to that of first-
generation agents. But the newest agentsgive physicians
the ability to tailor treatment to combat several different
typesof infections, the availability of injectable, topical,
and oral dosage forms, and a choice between short-acting
and long-acting agents, depending on the nature of the
infection, including bacterial strainsheretofore resistant to
Cutler and M cClellan’sevidence constitutesa powerful
argument for technological advancement in the care of
acute conditions. But these typesof advancesin
technology alone are not the answer to the problem of
rising health care costs. For those suffering from serious
conditions— low-birth-weight babiesand adultswith
heart disease, for example — technology certainly provides
the most cost-effective treatment. However, never to have
to treat a chronic or acute condition in the first place isstill
the least expensive option. While encouraging growth in
the area of medical technology
to treat acute conditions, it is
also important to see how
medical innovation can help
maintain a commitment to
primary and preventive care. We
must continue to use disease
management for chronic
conditionsand preventive care,
even if the effectsare not as
sensational asthose of life-
saving technologiesfor acute
The availability of a broad range
of medicines enables physicians to
treat with precision the individual
needs of diverse patients and
provides options when the first
agent used is either ineffective or
Wilde, M ., Barfield, P. “ Fluoxetine: A Pharmacoeconomic Review of ItsUse in Depression.” PharmacoEconomics, 1998; 13(5): pp. 543-61.
Berndt, E., et al. “ The M edical Treatment of Depression, 1991-1996: Productive Inefficiency, Expected Outcome Variations, and Price Indexes.”
NBER Working Paper no. 7816; Berndt, E., et al. “ Price Indexesfor Acute Phase Treatment of Depression.” Medical Care Output and Productivity,
ed. D. Cutler, E. Berndt.
Cutler, D., M cClellan, M ., 2001.
Wertheimer, A., Levy, R., O’ Connor, T. 2001.
It isalso important to note that some drugsmay be cost-
effective even though they do not result in actual savings.
In other words, the extra cost associated with the new
drugsmight not be fully offset by cost reductions
elsewhere in the health care system, meaning that total
costsincrease. But if the extra costsare more than offset
by other benefits, these new drugswill still be cost-
effective. For example, second-generation pharmaceuticals
used in the treatment of diabeteshave several advantages
over the first-generation agentsin thisclass. A study of
5, 000 M edicaid patientsdetermined that the addition of
the new agentswascorrelated 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 expendituresincreased for
patientswho used the new agents, since these drugsare
more expensive than the first-generation agents. The net
result wasthat total expenditureswere unchanged.
Although overall costswere not reduced, the addition of
these incremental improvementsresulted in a higher level
of glycemic control without increasing costs.
innovation did not lead to total cost savings, but when
benefitsare factored in, the use of the second-generation
product isshown to be cost-effective.
In another example, the Scandinavian Simvastatin
Survival Study found that using the drug simvastatin for
treatment of cardiac patientsincreased drug spending by
$11 million but reduced hospital admissionsby one-third
and hospital costsby $8 million among the 2, 221 study
A more recent study of these cholesterol-
lowering drugsestablished that they reduced the risk of a
heart attack or stroke by one-third. In the world’slargest
study of people at high risk for these conditions,
simvastatin, or Zocor, wasshown to be much more
powerful than the popular antioxidant vitaminsC, E, and
beta-carotene, previously thought to protect the heart. The
study, conducted by a British team of researchersled by
Dr. Rory Collinsof Oxford University, involved 20, 000
participantswho were followed over five and a half years.
Dr. Collinssaid that “ statinsare the new aspirin, ” and that
if 10 million high-risk patientsstarted taking statins,
50, 000 deathswould be prevented each year.
“ Cholesterol Pill Linked to Lower Hospital Bills.” New York Times, M arch 27, 1999.
Altman, L. “ Cholesterol FightersLower Heart Attack Risk, Study Finds.” New York Times, November 14, 2001.
Cost Savings versus Cost-Effectiveness
The fact that a drug addsto overall health care costsdoesnot mean that it should not be used. The key issue is
whether the increased costsare justified by the benefitsproduced by the drug. In the case of statins, discussed on
page 11, it appearsthat by reducing the number of acute cardiac events, the drug producesquality-of-life benefits
that justify the increase in overall health care costs.
Thisexample illustratesan important distinction — some drugsmay actually reduce overall health care costsand
thusproduce cost savings. Other drugsmay raise overall health care costswhile simultaneously producing other
benefits, such asreductionsin mortality or enhanced productivity or health status, that are deemed to be “ worth”
the additional cost. (A determination of “ worth” isusually made by comparing the drug to other potential
interventionsand finding that these alternativesproduce fewer benefitsfor the same cost and/or the same benefitsat
higher cost.) Both of these typesof drugsare said to be “ cost-effective” — in other words, cost-effectivenessdoesnot
necessarily imply cost savings. Of course, some drugsmay raise costswhile producing fewer benefitsthan alternative
treatments— these drugsare not considered to be cost-effective.
Finally, technology assessment can help avoid the spread
of technology that generatescostsexceeding benefits. In
the extreme case, effective technology assessment can
avoid “ flat-of-the-curve medicine, ” in which treatments
have high costsand virtually no benefits. Asexplained by
Victor Fuchs, “ When assessment catalyzesthe
abandonment of interventionswhose risksexceed their
health benefits, it can lower the cost of health care
without sacrificing itsquality.”
Single-drug studies, taken asa whole, can shed some
light on, but cannot definitively answer, the more general
question of the overall impact of new drugs. In fact,
researchersrecently attempted to addressthisquestion
through a meta-analysisof multiple single-drug studies.
Peter Neumann of the Harvard School of Public Health and
several colleaguesevaluated 228 published cost-utility
analysesof specific drugs. But their findings, while
informative, are not able to answer the question asto
whether, in general, pharmaceutical innovation and the
increased use of new drugsproducesbenefits— enhanced
health status, reduced health care costs, and/or enhanced
productivity — that are greater than the incremental costs
of the drugsthemselves. Rather, their conclusion isthat
“ some drugsdo save money or are cost-effective, but
these determinationsdepend critically on the context in
which the drug isused and the intervention with which it
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 studiesthat examine the aggregate impact
of drugs. Fortunately, over the last five years, a growing
body of research hasemerged that takesthisvery
In thissection, we review the evidence suggesting that,
in aggregate, the introduction of new drugshasyielded
substantial increasesin health statusand economic growth,
along with significant reductionsin overall health care costs
that far outweigh any increase in costsfrom the drugs
themselves. These studiesdo seem to suggest that new
drugsare “ worth it.” The remainder of thissection
evaluateseach of the key areasof improvement — health
status, overall health care costs, and economic
Enhanced Health Status
A number of aggregate studieshave shown that the
introduction of new drugshasmade 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), M ark M cClellan of Stanford University
Fuchs, V.R., Garber, A.M . “ The New Technology Assessment.” The New England Journal of Medicine, 1990; 323(10): pp. 673-7.
Neumann, P., et al. “ Are PharmaceuticalsCost-Effective? A Review of the Evidence, ” Health Affairs, 2000; 19(2): pp. 92-109.
Within many sectorsof the economy, the quality of goodsand servicesincreasesover time. Perhapsthe best
example of thisphenomenon isin computers, where the capabilitiesof most products(e.g., speed, ability to handle
software and Internet applications) have increased dramatically over time, even aspriceshave fallen. Another example
comesfrom the automobile industry, where there have been dramatic improvementsin recent years, including the
addition of air bagsand new featuresthat have led to better fuel efficiency. In these and other industries, it isunfair
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 calculateswholesale and retail price inflation in the United
States) doesattempt to calculate “ quality-adjusted” inflation in some sectorsof the economy (e.g., apparel, consumer
electronics), it haslargely not done so with pharmaceuticals. The primary reason isthat such an exercise would require
the ability to understand whether new productswithin a therapeutic classactually improve outcomes(e.g., increased
longevity, enhanced productivity, better quality of life), and to assign a value to these improvements. Unfortunately, it
isdifficult to make such calculationswith the precision that might be required for a government inflation adjustment.
But asCutler’swork suggests, pharmaceuticalsand other health care treatmentsmay be leading to improvementsin
health care outcomesthat, even using conservative estimatesof the value of added life-years, are extremely valuable
to society and to individuals. If these gainscould be calculated in a rigorousfashion for the industry asa whole, it is
likely that quality adjustmentswould lead to lower estimatesof pharmaceutical price inflation.
and NBER, and Joseph Newhouse of Harvard University,
examined the reasonsfor the 30 percent drop in the
mortality rate from acute myocardial infarctions(AM Is), or
heart attacks, between 1975 and 1995. The authorsfind
that behavior changesaccount for relatively little of the
decline. Rather, changesin the medical treatmentsfor the
management of AM Isare responsible for the majority —
55 percent — of the reduction in mortality, with
pharmaceuticalsalone 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-blockerswassingled out as
the major contributor to the reduction in mortality. The
same study found that the typical heart attack victim lived
5 yearsand 10 monthsafter a heart attack in 1991,
8 monthslonger than in 1984. Thisincrease in life
expectancy isconservatively 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 servicesrather than
the price of a given service). Cutler goeson to suggest that
the true “ price” of heart attack care hasbeen falling
during thistime period, asthe quality improvement from
increased longevity alone servesasan effective price
reduction to consumersthat more than outweighsany
increase in monetary costs.
Cutler, D., M cClellan, M ., Newhouse, J. “ The Costsand Benefitsof Intensive Treatment of Cardiovascular Disease.” Conference Paper,
Measuring the Prices of Medical Treatments, American Enterprise Institute/BrookingsInstitution, December 12, 1997.
A second study by Cutler and
Srikanth Kadiyala of the National
Bureau of Economic Research
(NBER) buildson these resultsby
looking at changesin survival
ratesafter AM Isand strokes. This
study creditsmedical research —
which helpsto create new drugs
and treatment protocols— for at
least a third of the observed
improvement in survival rates,
with new therapiesto reduce
blood pressure and cholesterol
being worth 13 percent on their own.
In a separate
analysis, M urphy and Topel estimate that the total
economic value to Americansfrom reductionsin mortality
from cardiovascular disease between 1970 and 1990 is
$1.5 trillion each year.
Thus, Cutler and Kadiyala’sanalysiswould suggest that
$500 billion or more of thiseconomic value isthe result of
medical research that leadsto new drugsand treatments;
thisfigure is20 timesgreater than the NIH annual budget.
In fact, the fruitsof medical research asmeasured by the
gainsfrom reductionsin mortality from cardiovascular
disease alone are significantly greater than the cost of all
In a third study of heart disease, M aria Hunink of the
University of Groningen in the Netherlandsand M ilton
Weinstein of the Harvard School of Public Health find that
nearly three-quartersof the 34 percent decline in mortality
from coronary heart disease (CHD) that occurred between
1980 and 1990 isdue to improvement in the management
of patientswith diagnosed CHD. (Primary prevention
accounted for only one quarter of the decline.) The authors
single out lipid-lowering drugsfor patientswith high
cholesterol asbeing especially effective. In fact,
improvementsin low-density and high-density lipoprotein,
whether through diet or medication, explain a full one-
third of the decline in mortality.
Evaluating the Impact of
All New Drugs
Aswith the resultsof the
single-drug studies, evaluations
of the role of drugsin cardiac
care — especially specific aspects
of that care such aspost-M I
treatment — do not prove that
new drug introductionsin the
aggregate have had a positive
impact on health status. As
Cutler himself noted in his1997
study, “ the important question iswhether our results
generalize to other typesof medical care.”
M uch of the work in examining thisvery issue hasbeen
conducted by Frank R. Lichtenberg of Columbia University
and the NBER. Lichtenberg analyzesdata over the 1960-
1997 period to calculate both the pharmaceutical R& D
expenditure per life-year gained over thisperiod and the
medical expenditure per life-year gained. He beginswith
an estimate of the long-run elasticity of longevity with
respect to total health expendituresand the corresponding
elasticity with respect to pharmaceutical R& D (asindicated
by the number of new drugsapproved). Evaluating these
elasticitiesat the sample mean (e.g., 20.8 new drugs
approved per year) allowsthe author to calculate the
addition to life expectancy that would occur if just one
additional drug were approved each year (or
correspondingly, the addition to life expectancy from a one
dollar increase in medical expenditures). He then estimates
the total life-yearsgained per year from a permanent unit
increase in both new drug approvalsand an extra dollar of
per capita health expenditure. The next step isto estimate
the cost involved in achieving thislife-year gain (a figure of
$500 million isused to reflect the cost of obtaining FDA
approval of a new drug). Using thismethodology,
Lichtenberg estimatesthat the pharmaceutical R& D outlay
per life-year gained at $1, 345. The corresponding figure
for the cost of medical care per life-year gained isabout
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’sInvestment in M edical Research.
M urphy, K., Topel, R. The Economic Value of Medical Research, Revised, September 1999. Earlier version presented asthe Thompson Lecture to
the M idwest Economic Association and in workshopsat the World Bank, M IT, University of Chicago, and Boston University.
Cutler, D., Kadiyala, S. 1999.
Hunink, M ., et al. ” The Recent Decline in M ortality from Coronary Heart Disease, 1980-1990. The Effect of Secular Trendsin Risk Factorsand
Treatment.” Journal of the American Medical Association, 1997; 277(6): pp. 535-542.
Lichtenberg, F. Sources of U.S. Longevity Increase: 1960-1997. Working Paper No. 405. December 2000. Center for Economic Studiesand Ifo
Institute for Economic Research. M unich, Germany.
The total economic value to
Americans from reductions in
mortality from cardiovascular
disease between 1970 and 1990 is
$1.5 trillion each year.
The first important finding
from thisstudy isthat the cost of
adding life-yearsto the U.S.
population ismuch lessif it is
achieved through the
introduction of new drugsthan
if it isdone more generally
through health care outlays. It
takesonly about one dollar of
outlaysfor new drugsto achieve
the same gain in life-yearsas
eight dollarsscattered through
the health care system asa
whole. Thus, it takes“ lessbuck to get the bang” if the
strategy iskeyed to new drugs.
Second, Lichtenberg juxtaposeshiscalculationsof the
cost of achieving life-year gainswith figurespulled from
other research on the benefits of life-yearsgained. Using a
figure of $150, 000 asthe average value of a life-year,
Lichtenberg findsthat the benefit-to-cost ratio is13.6 for
general medical expendituresand 111.5 for pharmaceutical
Figure 5 demonstratesthe
wide range in the calculation of
the value of a life-year.
Conservative estimates, like
those of Cutler et al., and our
update of thisapproach to
approximate what the value
would be in 2000, do not
account for non-market
valuation of life. Estimatessuch
asthose by M urphy/Topel
attempt to account for non-
market values, and are thus
quite a bit larger. No matter which estimate one choosesto
use, however, the cost-effectivenessof pharmaceutical
innovation isstill readily apparent. For example, if the
figure of $38, 000 issubstituted for the $150, 000 used by
Lichtenberg for the average value of a life-year, the
benefitsare still 28 timesaslarge asthe cost of
“ producing” thisextra life-year through pharmaceutical
Estimating the Value of a Life-Year
The studiescited in thisreport use alternative approachesfor setting the value of a life-year. Some researchers
estimating the economic “ output” of an individual use average per capita income (or per capita grossdomestic product)
asa proxy for the value of an additional year of life. Thismethodology isgenerally considered to be relatively
conservative, asit doesnot assign a value to benefitsoutside of a person’searnings, such asthe enjoyment of leisure.
Recent articlesby expertson the economicsof medical research and technological innovation are using a measure of full
income and full consumption that includesthe value of non-market time. They believe that “ value of life” calculations
that focussolely on earned income understate the “ willingnessto pay” for additional life-years. Since many gainsin
health and longevity described in thisreport are concentrated among older people, for whom earningsare typically
lower and non-market time more important, it isparticularly important to use a construct for the value of a life-year that
includesboth market and non-market time.
Emerging research also showsthat medical advances, or breakthroughsin the battle against one disease, may increase
the value of advancesagainst other diseases. This“ complementarity” can be illustrated by the fact that if more people
survive heart disease in middle age, or asthe “ young-old, ” there will be more people who stand to benefit from a
breakthrough against Alzheimer’sasmore people make it to the “ older-old” years. ProfessorsKevin M urphy and Robert
Topel of the University of Chicago have developed a model for assessing the value of medical research. They find that
changesin 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: M urphy, K., Topel, R. The Economic Value of Medical Research, forthcoming.
It takes only about one dollar of
outlays for new drugs to achieve
the same gain in life-years as eight
dollars scattered through the health
care system as a whole.
Estimating theValueof a Life-Year
Cutler et al. 2000 GDP Estimate M urphy/Topel
Source: Cutler, D., et al. ascited in Lichtenberg, “ Are the Benefitsof Newer DrugsWorth Their Cost?
Evidence from the 1996 M EPS, “ Health Affairs, 2001; 20(5): pp. 241-51. Author’sestimate based on 2000 GDP
and 2000 Censusdata; M urphy/Topel, The Economic Value of Medical Research, Revised September 1999.
A second study by Lichtenberg looked at the role of new
drugsacrossdisease types. Evaluating all diseases, patients,
and outpatient drugs, Lichtenberg found that there wasa
direct correlation between reductionsin mortality within a
particular disease and the number of new drugsused to
treat that disease. These resultsare controlled for effects
on mortality of other economic/social trendsand non-drug
innovations, such asnew surgical proceduresand vaccines.
Over 45 percent of the variation in mortality across
diseasesbetween 1970 and 1991 isexplained by the
extent to which new drugsare 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 wasover five timesgreater
(72.7 percent versus13.0 percent) in diseaseswith the
highest utilization of new drugsthan for diseaseswith the
lowest utilization of new drugs. On average, Lichtenberg
estimatesthat each of the 436 new drugsintroduced
between 1970 and 1991 annually adds11, 200 aggregate
yearsof life to the U.S. population. Lichtenberg findsthat
new drugsappear to have reduced mortality in all age
categoriesin at least one of the two decadesstudied. He
also concludesthat the “ elasticity of mortality” isabout
one-half (e.g., a 10 percent increase in new drug approvals
isestimated to reduce mortality by 5 percent).
International Comparisons of the
Value of Drugs
The work by Cutler, Lichtenberg, and othersisprimarily
confined to the United States. Relatively little work, in fact,
hasbeen done to evaluate the role of drugsaround the
world. H.E. Frech and Richard D. M iller, 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 M iller find a significant, positive
relationship between pharmaceutical spending and life
expectancy at age 40 and age 60. The finding isespecially
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 ages40 and 60. In other
words, pharmaceutical expenditurestend to prolong life at
ages40 and 60, but other typesof health care
International comparisonssuch asthose made by Frech
and M iller demonstrate that advancesin pharmaceutical
treatment and other medical technologiesmust be
evaluated within the larger context of public health and
Lichtenberg, F. Pharmaceutical Innovation, Mortality Reduction, and Economic Growth, presented at the Conference on The Economic Value of
M edical Research, December 1999.
Frech, H., M iller, D. The Productivity of Health Care and Pharmaceuticals: An International Comparison. Washington, D.C.: AEI Press, 1999.
economic development. Along
with health care services, the
political, social, economic, and
environmental climatesof a
nation also influence the overall
health of the population. In fact,
echoing earlier work by Aaron
Alvin Tarlov notes
that economic and public health
factorssuch asclean water,
sanitary housing, and improved
diet have, in the last century,
contributed more to increased life
expectancy than have medical
According to Tarlov,
other than penicillin and a few
other antibiotics, no single
medical advance hashad as
drastic an effect on life expectancy and overall health as
have these non-medical factors.
That said, ascountriesbecome more developed, the
incremental gainsfrom improvementsin public health
(e.g., cleaner water, more sanitary housing) diminish
significantly, while gainsfrom medical interventions
become relatively more important. In the U.S., for example,
Penny M ohr and colleaguesfound that medical
interventions, including pharmaceutical treatments, now
contribute more to gainsin life expectancy than do the
typesof public health advancesthat took place during the
early and middle part of the twentieth century. Within the
U.S., the greatest life-saving advancesin recent yearshave
been due to pharmaceuticals. In addition to the already-
mentioned effectsof antibiotics, vaccinationshave all but
eradicated killer conditionssuch asdiphtheria, whooping
cough, measles, and polio.
The importance and cost-
been demonstrated clearly over
the last century.
Among U.S. Regions
comparisonsare obviously hard
to make, comparative analysis
of pharmaceutical utilization
acrossregionswithin a country
may yield more reliable or
robust results. Thistype of
analysiscan help usinfer the
impact of drugsover time from
Both the value and difficulty
of cross-sectional analysisare
evident in Pierre-YvesCremieux, et al.’sattempt to tie
pharmaceutical use patternsto infant mortality ratesacross
regionsof the U.S.
Using multiple regression analysis, the
researchersfound that regionswith higher overall spending
on pharmaceuticalshad lower infant mortality ratesthan
those that spent fewer dollarson pharmaceuticals. Several
other factors, including the number of teen pregnancies,
number of physiciansper capita, and low-birth-weight
prevalence were also found to have a substantial effect on
infant mortality rates. Variablesother than pharmaceutical
spending will, of course, have important effectson infant
mortality, but Cremieux and colleaguesobserve that “ the
increase in spending [on pharmaceuticals] observed in the
United Stateshasbeen accompanied by a measurable
effectivenessthat translatesinto lower infant mortality.”
The authorsfound that regionsthat spend more on
pharmaceuticalsalso tend to be those regionswhose
health care systemsand public health infrastructuresare
more effective at promoting health asmeasured by infant
mortality. In other words,
pharmaceutical innovation and
the use of pharmaceuticalsin
treatment may, in fact, promote
more efficient and better quality
health systems. These improved
overall delivery systemslead to
better outcomessuch as
reduced infant mortality.
The reduction in premature death
was over five times greater in
diseases with the highest utilization
of new drugs. On average, each of
the 436 new drugs introduced
between 1970 and 1991 annually
adds 11,200 aggregate years of life
to the U.S. population.
Regions with higher overall
spending on pharmaceuticals had
lower infant mortality rates than
those that spent fewer dollars on
Wildavsky, A. “ Wealthier isHealthier.” Regulation, 1980; 4(1): pp. 10-2.
Tarlov, A. “ The Coming Influence of a Social SciencesPerspective on M edical Education.” Academic Medicine, 1992; 67(11): pp.724-30.
M ohr, P., et al. The Impact of Medical Technology on the Future of Health Care Costs, February 28, 2001. Project Hope, Bethesda, M aryland.
Cremieux, P., et al. “ Pharmaceutical Spending and Health Outcomesin 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.
Improving the Quality of Life
Virtually all of the studiesmentioned in thissection 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 estimatesof the benefits
created by medical advancesincluded in these studiesare likely to significantly understate the true benefits.
expected to continue to have a
major impact on life expectancy,
primarily by further reducing
mortality ratesin diseasesthat
today claim many lives. In fact,
four studiesby the Battelle
Institute predict disease
patternsin 2015 in the U.S., Germany, France, and the
United Kingdom. They suggest that pharmaceutical
advanceswill continue to be a major contributor to
reductionsin 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 advancesare
expected to save $420 billion over a 10-year period.
Reductions in Overall Health
Asnoted previously, a number of studieshave suggested
that use of a single new drug can serve to reduce costsin
other partsof the health care system. In many cases, these
studieshave found reductionsin use of hospital and
emergency services. In some cases, the reductionsare
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 savingsgenerated elsewhere.
Macro-Analyses of the Impact of New Drugs
on Overall Health Costs
Aswith evaluationsof new drugson health status,
researchershave recently tried to expand the body of
research found in single-drug
studiesby conducting macro-
analysesof the impact of
pharmaceuticalson overall health
care costs. Some of these studies
look at the costsof treating a
particular disease. For example, a
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
advancesin antidepressant drugs.
Other studieslook at the impact of new drugson overall
health care costsacrossdiseasesand conditions. A study by
Lichtenberg evaluated data on the drugsprescribed by
physiciansin outpatient visits, by disease, from the 1980
and 1991 National Ambulatory M edical Care Survey Drug
M entionsfilesproduced by the National Center for Health
Statistics. From these data, Lichtenberg found that the
number of hospital daysdeclined most rapidly for those
diagnoseswith the greatest increase in the number of
drugsprescribed and the greatest use of new drugs. He
also found that increased drug use wasassociated with a
lower likelihood of a referral to another physician and a
reduction in inpatient surgical procedures. In fact, his
estimatessuggest that each increase of 100 prescriptionsis
associated with 16.3 fewer hospital days. He extrapolates
these figuresto find that each $1 increase in
pharmaceutical spending yieldsa $3.65 reduction in
hospital expenditures. Allowing for an expenditure increase
of $1.54 for physicians’ servicesassociated with the
additional pharmaceutical spending still leavesa reduction
of $2.11 for the extra $1 in drug spending. Assuming no
changesin other componentsof health care spending
(e.g., long-term care), the net gain for $1 in extra drug
spending is $1.11.
These estimatesdo 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 savingswould likely substantially
increase the estimated value of pharmaceutical use.
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 EconomicsBriefing, No. 31. November 1994.
National Bureau of Economic Research. Measuring the Prices of Medical Treatments. Washington, D.C. December 1997.
Lichtenberg, F. “ Do (M ore and Better) DrugsKeep People Out of Hospitals?” AEA Papers and Proceedings. M ay 1996; 86(2): pp. 384-88.
The cost of treating major
depression in the U.S. fell by 25
percent from 1991 to 1995 because
of advances in antidepressant drugs.
Lichtenberg also documents
the cost-effectivenessof new
He findsthat the use of
newer, and generally more
decreasesthe overall costsof
managing a variety of conditions.
By decreasing mortality,
decreasing the need for hospital
and other services, and increasing quality of life through
dayswithout diminished functioning, newer drugsmore
than pay for their extra cost. Using data from the M edical
ExpendituresPanel Survey (M EPS), Lichtenberg findsthat
using newer drugshasa statistically significant effect on
reducing the number of dayslost from work and lowering
mortality rates. But the most significant effectshe found,
the onesthat taken alone would justify the increased cost
of new drug prescriptions, were decreased hospital stays
and use of inpatient services.
The difference in the cost of a prescription between an
“ old” drug and a “ new” drug in thisstudy could be
represented by the difference between a 15-year-old drug
and a 5.5-year-old drug. Substituting the newer for the
older product would raise the cost of the prescription by
$18. Lichtenberg findsthe corresponding reduction in cost
to be $56 per hospital stay. The study found not only that
those who use newer drugsspend lesstime in the hospital
than those using older drugs, but also that their average
stay costsless. The use of newer drugswasalso associated
with reduced outpatient department events, office-based
events, emergency department use, and dental care.
Combining these effects, Lichtenberg findsthat for an $18
increase in cost due to a newer prescription, total health
care spending isreduced by a little more than $71, or four
timesthe added prescription drug costs.
In a more recent study Lichtenberg findsthat people
who use newer drugshad better post-treatment health
than people using older drugsfor the same condition, even
after controlling for variablessuch assex, age, race and
income. These people were more likely to survive, their
perceived health statuswashigher, and they experienced
fewer limitationson everyday activities. People using newer
drugstended to experience a greater increase, or smaller
decline, in physical ability than those consuming older
drugs. Lichtenberg also finds
that the effect of drug vintage
on health ishigher for people
with low initial health than it is
for people with better initial
health status. Therefore, in
contrast to other typesof
technical progress, which tend
to increase economic inequality,
pharmaceutical progresshasa tendency to reduce
inequality aswell asto promote economic growth, broadly
A cautionary note emergesfrom a recent paper prepared
for the Health Insurance Association of America and Blue
Crossand Blue Shield Association by Penny M ohr and her
colleaguesat Project Hope. M ohr assessed the impact of
new medical technologieson the cost of health care, and
found that new medical technologies, which can include
new drugs, are sometimesover-utilized and therefore drive
up health care costs. While these technologiesmay reduce
costsif their use isrestricted to an appropriate population,
they can actually drive up overall costsif they are employed
in the care of those patientsoutside the population for
whom they have been shown to be medically appropriate
Perhapsthe best strategy for preventing overuse and
inappropriate use of pharmaceuticalsisto tie utilization of
drugsto best practice research and established clinical
guidelines. Thisstrategy isfar more likely to result in the
realization of benefitsthat outweigh the incremental costs
of the new drug. Kleinke arguesthat two factorslimit the
incentivesfor managed health care plansto use evidence-
based criteria in deciding which drugsto pay for: 1) 22
percent of a plan’spopulation disenrollsevery year, making
it difficult for the plan to recoup itsinvestment in
innovative drugsand disease management; and, 2) the
major componentsof care (and their associated data) are
managed by different vendors. He notesthat “ [t]his
isolation galvanizeshealth plans’ perspective that drugsare
a cost item to be managed, not a health maintenance
investment to be leveraged… .[The] current hysteria over
pharmacy costssuggeststhat the typical health plan’s
culture remainsincapable of taking a ’systems’ view of a
line-item cost problem… .Expensive drugsare guilty of
driving up total medical costsuntil proven innocent.”
Lichtenberg, F. “ Are the Benefitsof Newer DrugsWorth Their Cost? Evidence From the 1996 M EPS.” Health Affairs, 2001; 20(5): pp. 241-51.
Lichtenberg, F. “ Pharmaceutical-Embodied Technical Progress, Longevity, and the Quality of Life: Drugsas‘ Equipment for Your Health.’ ”
M ohr, P., et al. The Impact of Medical Technology on the Future of Health Care Costs, February 28, 2001. Project Hope, Bethesda, M aryland.
Kleinke, J. “ Just What the HM O Ordered: The Paradox of Increasing Drug Costs.” Health Affairs, 2000; 19(2): pp. 78-91.
The use of newer, and generally
more expensive, drugs actually
decreases the overall costs of
managing a variety of conditions.
In a recent article in Health
Affairs, Kleinke arguesthat
progressand increased quality
will almost certainly drive up the
cost of medical care: “ … medical
progressisexpensive… . By
contrast — and in sharp conflict
with many of the presumptions
of managed care — bad
medicine ischeap, and bad
public health even cheaper.”
vilified in the popular media and by insurersasthe primary
culprit in rising health care costs. However, without
breakthrough pharmaceutical innovations, Kleinke believes
that increased life expectancy, declining ratesof infant
mortality and disability among the elderly — which are
falling three timesasfast asthey did over the previous
eight decades— aswell asimproved management of
chronic and often fatal illnesseswould all be impossible.
Though the cost of new drugsisoften high, emerging
research suggeststhat their use isvery often quite cost-
Kleinke seesthe increased spending on drugsthat
manage disease, preclude or delay surgeries, and reduce
the use of hospital servicesaseconomic, not just medical,
progress. It “ reflect[s] a profound, permanent movement in
our health care system away from medical labor and
toward medical technology — a belated catching-up of
health care with the rest of the ‘ new economy.’ ”
on to argue that “ [h]igh-price new drugsmay be the
cheapest weapon we have in our ongoing struggle against
rising overall medical expenses; unfortunately, we do not
have sufficient data to prove this.”
While recognizing that
prescription drugsaccount for a larger percentage of
health care expenditures(rising from 5.5 percent to 8.5
percent during the 1990s), Kleinke suggeststhat this
increase isovershadowed by the administrative waste in
our overall health care system.
Noting that insurershave
blamed the recent rise in
premiumson increased drug
spending, Kleinke countersthat
even a 20 percent increase in a
component that accountsfor only
8.5 percent of all spending
cannot account for the double-
digit premium increasesthat
have occurred in recent years.
But even more importantly,
current analysesthat take the
claimsof the insurance industry
at face value do not take into
account savingsin other
componentsthat would result
from the appropriate use of new
drug therapies. Contrary to
popular claims, new drugsand
the increased use of drugsfor
chronic conditions, rather than driving insurersto the brink
of financial ruin, would constitute the fulfillment of
managed care’smarketing message of increased quality.
However, to achieve thisgoal, payerswould have to be
willing to invest money in drugsthat may not pay off in the
short term. For an industry that seesbetter than 20 percent
annual enrollment turnover, and that must justify earnings
and expendituresquarterly, the long-range perspective,
most likely to help patients, isnot the same perspective that
will serve stockholders. “ Few in health care purchasing
circleswill admit the real truth: Rising drug costsare, in
general, part of the solution, not part of the problem, ”
But, they can only be part of the solution
to control spending, if reimbursement mechanismsare
based on sound clinical research, and prescriptionsare
targeted specifically to those patientswho would reap
health benefitsgreater than the increased cost of the drug.
Otherwise, prescription drug expendituresmay begin to
outpace the health and economic benefitsthey are
designed to promote.
Increased Economic Growth
Even if increased use of new drugsdoesnot generate
enough savingselsewhere in
the health care system to justify
the increased cost of the drugs,
it isstill possible that the
increased expenditureswill “ pay
for themselves” by generating
economic benefitsoutside of
the health care system.
Kleinke, J. “ The Price of Progress: Prescription Drugsin the Health Care M arket.” Health Affairs, 2001; 20(5): pp. 43-60.
Ibid, p. 46.
Ibid, p. 47.
Ibid, p. 49.
For an $18 increase in cost due to a
newer prescription, total health care
spending is reduced by a little more
than $71, or four times the added
prescription drug costs.
People who use newer drugs had
better post-treatment health than
people using older drugs for the
Stimulating Economic Growth
A number of researchersmake the argument that
increased longevity (which, asdemonstrated previously, is
in large part due to increased use of pharmaceuticals) plays
a very important role in stimulating economic growth, with
some estimatessuggesting that it doublesthe rate of
growth in the economy astraditionally measured.
To understand thisargument, one must first examine the
impact of longer life spanson the economy. Lichtenberg
arguesthat increasesin life expectancy yield improvements
in the economic well-being of the average person. To
support thisview, he notesthat the typical person born in
1995 can expect to live 22 yearsor 41 percent longer than
the average person born in 1920.
moreover, are in much better health than they were in
previousgenerations. Thismeansthat they are better able
to continue working, if they wish to do so, yielding more
tax revenues; they use lesshealth care, taking some
pressure off M edicare and M edicaid; and they spend more
on other goodsand services. In short, enhanced longevity
contributesto economic growth.
Yet the most common measure of long-run economic
growth — growth in annual per capita grossdomestic
product or GDP — doesnot take
into account increasesin life
expectancy. William Nordhaus, for
one, arguesthat there is
substantial underestimation of
economic growth due to the
failure to account for increased longevity. He estimatesthat
the growth due to longevity, over the course of the last
century, isabout aslarge asthe measured growth in non-
health goodsand services. Once adjusted, the rate of
growth, Nordhausclaims, istwice aslarge astraditional
M urphy and Topel believe that longevity playsa
very important role in stimulating economic growth. They
estimate the value of extending life from the perspective of
the “ present value” of the extra yearsof life. Using this
calculation, they find that the value of extensionsin life
expectancy hasbeen roughly $57 trillion over a 20-year
period, a figure that roughly equalsthe gainsin
consumption asmeasured by growth in national income.
Using yet a third methodology, Nordhausfindsthat for
every time period since 1900, gainsfrom increased
longevity have been close to (if not above) the gains
generated from growth in national income.
In short, the economic value of increasesin life
expectancy are an important and often forgotten source of
gainsin living standards; economic growth adjusted for
longevity may even be double that of more common
measuresof economic growth that do not take longevity
into account. And asnoted previously, several studieshave
come to the conclusion that pharmaceutical innovations
are responsible for a significant portion of the increase in
longevity that hasbeen experienced over the last 20 years.
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 researchershave
tested the impact that new drugshave on missed work
daysand missed school days. Reducing this“ down” time
should have a positive impact on the productivity of
workersand schoolchildren, which should in turn produce
short- and long-term benefitsfor the economy.
Asnoted earlier, studiesof
specific drugs, including those
for treating depression and
migraine headaches, have found
meaningful productivity benefits.
But relatively few studieshave taken an aggregate view of
the impact of new drugson the ability to work and time
away from work.
Asnoted above, Lichtenberg hasbegun to study the
effect of drug vintage — defined asthe year in which the
FDA first approved a drug’sactive ingredient — on health.
He hastested the hypothesisthat a person’shealth isan
increasing function of the average vintage of the drugshe
or she consumes, other thingsbeing equal. Hisinitial work
suggeststhat use of newer drugsreduceswork-lossdays.
Additional research in thisarea isexpected to reinforce this
Lichtenberg, F. Pharmaceutical Innovation, Mortality Reduction, and Economic Growth. Presented at the Conference on the Economic Value of
M edical Research, Washington, D.C. December 1999.
Nordhaus, W. The Wealth of Nations: Irving Fisher and the Contribution of Improved Longevity to Living Standards. Paper presented at Fisher
Conference, Yale University, M ay 1998.
M urphy, K., Topel, R. The Economic Value of Medical Research, Revised, September 1999. Earlier version presented asthe Thompson Lecture to
the M idwest Economic Association and in workshopsat the World Bank, M IT, University of Chicago, and Boston University.
Nordhaus, W. 1998.
Lichtenberg, F. 2001.
Enhanced longevity contributes to
Looking at these study findingsasa whole,
pharmaceutical innovation and the increased use of new
drugsprovide significant benefitsto society, benefitsthat
far outweigh the incremental costsof the drugs
themselves. In fact, the evidence
would suggest that these costs
are more than offset by declining
costselsewhere in the health care
system, making use of new drugs
justified from the narrow
perspective of cost savingswithin
the health care system alone.
But new drugsprovide even more important benefits
than cost savingselsewhere in the system. Use of new
drugsappearsto be responsible for significant gainsin life
expectancy, which in turn translate into quality-of-life
benefitsfor individual patientsand increased economic
growth for the nation asa whole. Cutler’swork suggests
that factoring quality benefitsinto the price of health care
would likely mean that the true
quality-adjusted price of medical
care isdeclining over time. And
even conservative estimates
suggest that enhanced life
expectancy substantially increases
the rate of economic growth in
the nation, with some estimates
suggesting that it doublesthe rate astraditionally
measured. Asvariousstudiesmake clear, the economic
value of thisenhanced growth far surpassesthe
incremental costsof the new drugsthat are primarily
responsible for creating the increased longevity and
associated economic growth in the first place.
U.S. policy analystshave
tended to focusalmost
exclusively on the share of GDP
going to health care without
factoring in how health care
investmentsmay be driving up
GDP itself. If health care dollars
are invested wisely in preventive
health and in new waysto manage chronic illnessand
disability, thiscan “ grow the pie.” If such health care
investmentstake a slightly larger share of a substantially
bigger pie, that could turn out to be a good outcome, not
a bad one. Of course, where money iswasted on
inappropriate or unnecessary care, redundant capacity, or
fraud and abuse, added health care outlaysdo not pay for
growth and more productivity.
The challenge isto target our
investmentstoward both basic
medical research and appropriate
technological applicationsso that
we can get the best “ bang for
Pharmaceutical innovation and the
increased use of new drugs provide
significant benefits to society.
Use of new drugs appears to be
responsible for significant gains in
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.”
Putting These Findings Together
New Directions for Policy
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