NCPA - National Center for Policy Analysis

The Impact of Newer Drugs

October 22, 2002

A reduction in the age of drugs -- defined as the years since approval by the U.S. Food and Drug Administration -- decreases other expenditures for the entire population by more than 7 times as much as it increases health expenditures, according to a recent study. People who take the new drugs are significantly less likely to die by the end of the period under study because the newer drugs are more effective. The drugs may obviate or reduce the need for costly hospitalization, institutionalization, or surgery.

Researchers estimate that reducing the mean age of drugs used to treat a given condition from 15 years to 5.5 years will increase prescription drug spending per medical condition by $18 for the entire population, but will lower other medical spending by $129.

  • This reduction yields a $111 net reduction in total health spending per medical condition -- with most savings attributable to reductions in hospital expenditures ($80 or 62 percent) and in physician office-visit expenditures ($24).
  • Other smaller savings occur in home health care ($12), outpatient visits ($10), and emergency room visits.
  • For the Medicare population, average medical expenditure per condition is 57 percent higher ($1,286 versus $817) than for the entire population -- thus the savings from newer drugs are also somewhat higher.
  • The total prescription drug expenditure per medical condition will increase by about $21, but the reduction in total non-drug spending per condition falls $176, yielding a $155 net reduction; hospital cost reduction accounts for 58 percent of the savings ($102); home health care is trimmed $37; and office visits $34.

The study also found that the mean age of drugs used by Medicare enrollees with private prescription insurance is about 9 percent lower than the mean age of drugs used by Medicare enrollees without either private or public prescription insurance.

Source: David R. Francis, Newer Drugs Cut Health Care Costs," NBER Digest, October 2002; based on Frank Lichtenberg, "Benefits and Costs of Newer Drugs: An Update," NBER Working Paper No. 8996, June 2002, National Bureau of Economic Research.

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