NCPA - National Center for Policy Analysis

Benefits of New Prescription Drugs Outweigh Costs

May 10, 2002

Rather than reform Medicare to capitalize on the health benefits and cost savings of consuming new medicines, both Republican and Democrat proposals for a Medicare drug benefit focus on cost containment.

But requiring patients to use generic drugs, or the cheapest type of branded drugs, rather than newer or most effective drugs, ignores the huge advances made in medicine and the improvements medicines have made in health care.

As spending on prescription drugs has increased and the rate of consumption quickened, health care spending on hospitals and physicians has actually decreased.

  • In 1960, Americans spent 10 percent of their health care dollar on medicines, and most of the money came from their own pocket.
  • Prescription drugs now account for just 9 percent of total health expenditures, even though there is a now a vast range of conditions for which there are treatments.

Furthermore, a study by researchers Frank Lichtenberg found that hospital stays, bed-days and surgical procedures declined fastest for patients who used more medicines and newer drugs.

  • He found an increase of 100 prescriptions is associated with 1.48 fewer hospital admissions, 16.3 fewer hospital days, and 3.36 fewer inpatient surgical procedures.
  • A $1 increase in pharmaceutical expenditure is associated with about a $4 reduction in other health expenditures.
  • New drugs have increased life expectancy, and lifetime income, by about 0.75 percent -1 percent per annum.

By contrast, controlling drug costs by limiting use of newer medicines will reduce people's well-being and increase total health care spending. For example, New Hampshire's cap of three prescriptions a month for schizophrenia patients in 1991 saved an average of $47 a year in drug costs for each patient, but added $1,530 in other health-care services.

Source: Robert M. Goldberg (Manhattan Institute), "A Better Prescription For Medicare," Wall Street Journal May 7, 2002.


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