NCPA - National Center for Policy Analysis


October 11, 2005

In the name of responding to bioterrorism, some pharmaceutical companies are pursuing patent enlargement -- both extension and expansions -- that threaten a competitive drug market, says J.T. Young, who served in the Treasury Department and the Office for Management and Budget. The near-term effect of monopoly-expanding provisions will be higher drug costs, says Young. Less clear but perhaps even more serious, are the long term implications of higher drug costs on adopting health information technology (IT).

Health information technology (IT) depends on its ability to provide early cost savings through access to lower cost generic drugs. Without generic drugs' cost savings, health IT's adoption will slow and its vast potential for hundreds of billions of dollars in systematic health care savings will be retarded. Consider:

  • Since 1998, prescription drug spending has grown at twice the rate of overall health care -- with an average annual growth of 15 percent versus 7.5 percent.
  • It is estimated that for each 1 percent increases in generic use, overall drug spending declines 1 percent.
  • A study by the RAND Corp. estimates widespread adoption of health IT could yield up to $162 billion in annual savings in our health care system.

Health care is the largest sector of the American economy in which IT has made the fewest inroads. It represents 15 percent of America's annual economy, but its average annual IT investment is less than half of the rest of private industry's.

New technology always grasps first at the most accessible rungs on the cost savings ladder and one of the accessible savings IT can reach is generic drugs. However, excessive patent extensions and enlargements for prescription drugs will pull many cost savings out of reach, says Young.

Source: J.T. Young, "A patent threat to health," Washington Times, September 29, 2005; based upon: Richard Hillestad et al., "Economics Of Health Information Technology: Can Electronic Medical Record Systems Transform Health Care? Potential Health Benefits, Savings, and Costs," Health Affairs, Vol. 24, Issue 5, 1103-1117, September/October 2005.

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