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The Benefits and Costs of Newer Drugs: Evidence from the 1996 Medical Expenditure Panel Survey

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  • Frank R. Lichtenberg

Abstract

The nation's spending for prescription drugs has grown dramatically in recent years. Previous studies have shown that the replacement of older drugs by newer, more expensive, drugs is the single most important reason for this increase, but they did not measure how much of the difference between new and old drug prices reflects changes in quality as better, newer drugs replace older, less effective medications. In this paper we analyzed prescribed medicine event-level data (linked to person- and condition-level data) from the 1996 Medical Expenditure Panel Survey (MEPS) to provide evidence about the effect of drug age on mortality morbidity, and total medical expenditure, controlling for a number of characteristics of the individual and the event. (Previous researchers have hypothesized that differences in treatment patterns across individuals and areas may occur because of physicians' uncertainty and ignorance over the best medical practice.) The MEPS data enable us to control for many important attributes of the individual, condition, and prescription that influence outcomes and non-drug expenditures and that may be correlated with drug age. These include sex, age, education, race, income, insurance status, who paid for the drug, the condition for which the drug was prescribed, how long the person has had the condition, and the number of medical conditions reported by the person. Indeed, the fact that many individuals in the sample have both multiple medical conditions and multiple prescriptions means that we can control for all individual characteristics both observed and unobserved by including individual effects'. The results provide strong support for the hypothesis that the replacement of older by newer drugs results in reductions in mortality morbidity, and total medical expenditure. Although the mortality rate in this sample is quite low making it difficult to detect any...

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8147.

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Date of creation: Mar 2001
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Publication status: published as Frank R. Lichtenberg, 2007. "Benefits and costs of newer drugs: an update," Health Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 485-490.
Handle: RePEc:nbr:nberwo:8147

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  1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  2. Tor Jakob Klette & Zvi Griliches, 1997. "Empirical Patterns of Firm Growth and R&D Investment: A Quality Ladder Model Interpretation," Discussion Papers 188, Research Department of Statistics Norway.
  3. David M. Cutler & Mark McClellan & Joseph P. Newhouse & Dahlia Remler, 1996. "Are Medical Prices Declining?," NBER Working Papers 5750, National Bureau of Economic Research, Inc.
  4. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-91, December.
  5. Lichtenberg, Frank R, 1996. "Do (More and Better) Drugs Keep People Out of Hospitals?," American Economic Review, American Economic Association, vol. 86(2), pages 384-88, May.
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Cited by:
  1. James W Hughes & Michael J Moore & Edward A Snyder, 2003. "Napsterizing Pharmaceuticals: Access, Innovation and Consumer Welfare," Levine's Working Paper Archive 618897000000000555, David K. Levine.

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