NCPA - National Center for Policy Analysis

Newer Drugs Cut Overall Health Care Costs

September 13, 2001

Despite a higher price tag, newer brand-name medications save more money in overall health spending than older, lower-priced drugs, according to a study in Health Affairs. The study defined 'new' drugs as those approved by the Food and Drug Administration (FDA) in the years just prior to 1996.

Frank R. Lichtenberg, a professor at Columbia University, examined federal data on a random sample of the U.S. population to determine if people taking recently approved medications had fewer hospital stays. He found people who are taking newer drugs are significantly less likely to be hospitalized than those taking older drugs, resulting in a longer life span and lower health costs.

Using the Agency for Health Care Research and Quality's Medical Expenditure Panel Survey for 1996, Lichtenberg found:

  • Taking new therapies resulted in a reduction in spending on non-drug health care of $71.
  • This far outweighs the average $18 increase in money spent on those new drugs.
  • With the new drugs, the likelihood of being hospitalized fell by one half of one percent.
  • Given that hospital stays average $8,000, expected hospital costs would decrease by $40 to $50.

Lichtenberg did not detect a significant decrease in lost work days, however.

Source: Frank R. Lichtenberg, "Are The Benefits Of Newer Drugs Worth Their Cost? Evidence From The 1996 MEPS," Health Affairs, September/October 2001; "Newer drugs cut overall healthcare costs: study," Reuters Health, September 6, 2001.


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