NCPA - National Center for Policy Analysis

Benefits of Newer Drugs Exceed Costs

April 2, 2002

Americans' spending on prescription medications has grown significantly since the mid-1980s. Although the use of prescriptions is increasing, another important factor in the rapidly rising outlays for drugs is that newer, more expensive drugs are replacing older drugs. A recent health care study estimated the average 1998 price for drugs introduced in 1992 or later was $71.49 per prescription, compared to $30.47 for previously existing drugs. However, research shows there are some definite benefits from the newer drugs.

Using data from the 1996 Medical Expenditure Panel Survey (MEPS), Frank Lichtenberg found that replacing older drugs with newer ones increases average prescription costs by about $18. However:

  • People taking the new drugs were significantly less likely to die by the end of the survey than those taking older medications.
  • They were also significantly less likely to miss days at work than people taking old drugs.
  • Most striking, he found that reducing the age of drugs cuts all types of non-drug medical expenses: hospital stays, office visits, outpatient visits, dental visits and emergency room visits.

The biggest reduction is in hospital expenditures, which account for nearly 42 percent of total medical expense. For example,

  • Replacing 1,000 old prescriptions with 1,000 new prescriptions will increase drug costs by $18,000 but will also reduce the number of hospital stays by nearly six.
  • Since the average cost of a hospital stay is $7,588, fewer stays would reduce costs by $44,469.

Lichtenberg cautions against a prevailing sentiment that individuals should use less expensive generic drugs to reduce health costs. He points out that the average age of generic drugs is much older, at 38 years, versus 23 years for brand name drugs. Thus "denying people access to branded drugs would increase total treatment costs, not reduce them, and would lead to worse outcomes."

Source: Marie Bussing-Burks, "Benefits of Newer Prescription Drugs Exceed their Costs," NBER Digest, October 2001; based on Frank Lichtenberg, "The Benefits and Costs of Newer Drugs: Evidence from the 1996 Medical Expenditure Panel Survey," NBER Working Paper No. 8147, March 2001, National Bureau of Economic Research.

For NBER Digest text

http://www.nber.org/digest/oct01/w8147.html

 

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