NCPA - National Center for Policy Analysis

New Drugs Can Reduce Health Care Costs

March 26, 2004

Health care costs, which currently account for 15 percent of gross domestic product (GDP), are expected to increase to 25 percent of GDP by 2030. However, this growth prediction could be trimmed with the use of new drug therapies, according to Gary Becker of the University of Chicago.

Many new prescriptions are costly, but in the long run they will reduce the need for more expensive hospital stays and in-patient treatments:

  • The Journal of Clinical Psychiatry reports that antidepressant expenditures increased from $400 per depressed person in 1990 to $1,300 in 2000; however, due to fewer hospital stays, total spending per depressed person actually declined.
  • New drugs have contributed to the decline in adult mortality in the United States and 50 other countries over the past 20 years.

While new drugs may not provide a full cure for debilitating diseases such as Alzheimer's, Parkinson's and AIDS, they will delay the severity of diseases, resulting in reduced expenses in hospital and nursing home care.

The problem with the new Medicare drug coverage, says Becker, is that it does not help those who need it most. It fully covers a patient's drug purchases up to $250 per year, and then covers 75 percent of expenses above $250 up to $2,250 -- then no coverage at all until expenses reach $5,100, putting those with major drug expenses in a bind.

Instead, Becker recommends raising the drug deductible to $1,000, and then having Medicare increase coverage as expenses increase -- for example, 50 percent coverage up to $3,000, 75 percent coverage up to $5,000, and so on. This would increase the cost for Medicare consumers with lower drug expenses, but it would also reduce the cost for those who need drug therapy the most, which would result in lower overall health care costs.

Source: Gary S. Becker, "New Drugs Cut Costs, and Medicare Can Help," BusinessWeek, March 22, 2004 and Paul E. Greenberg, et al, "The Economic Burden of Depression in the United States: How Did It Change Between 1990 and 2000?" Journal of Clinical Psychiatry, volume 64, No. 12, December 2003.

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