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Pharmaceutical-embodied technical progress, longevity, and quality of life: drugs as "equipment for your health"

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  • Frank R. Lichtenberg
  • Suchin Virabhak

Abstract

Several econometric studies have concluded that technical progress embodied in equipment is a major source of manufacturing productivity growth. Other research has suggested that, over the long run, growth in the U.S. economy's 'health output' has been at least as large as the growth in non-health goods and services. One important input in the production of health pharmaceuticals is even more R&D- intensive than equipment. In this paper we test the pharmaceutical-embodied technical progress hypothesis the hypothesis that newer drugs increase the length and quality of life and estimate the rate of progress. To do this, we estimate health production functions, in which the dependent variables are various indicators of post-treatment health status (such as survival, perceived health status, and presence of physical or cognitive limitations), and the regressors include drug vintage (the year in which the FDA first approved a drug's active ingredient(s)) and indicators of pre-treatment health status. We estimate these relationships using extremely disaggregated prescription- level cross-sectional data derived primarily from the 1997 Medical Expenditure Panel Survey. We find that people who used newer drugs had better post-treatment health than people using older drugs for the same condition, controlling for pre-treatment health, age, sex, race, marital status, education, income, and insurance coverage: they were more likely to survive, their perceived health status was higher, and they experienced fewer activity, social, and physical limitations. The estimated cost of the increase in vintage required to keep a person alive is lower than some estimates of the value of remaining alive for one month. One estimate of the cost of preventing an activity limitation is $1745, and the annual rate of technical progress with respect to activity limitations is 8.4%. People consuming newer drugs tend to experience greater increases (or smaller declines) in physical ability than people consuming older drugs. Most of the health measures indicate that the effect of drug vintage on health is higher for people with low initial health than it is for people with high initial health. Therefore in contrast to equipment-embodied technical progress economic inequality, pharmaceutical-embodied technical progress has a tendency to reduce inequality as well as promote economic growth, broadly defined.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9351.

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Date of creation: Nov 2002
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Publication status: published as Frank R. Lichtenberg & Suchin Virabhak, 2007. "Pharmaceutical-embodied technical progress, longevity, and quality of life: drugs as 'Equipment for Your Health'," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 371-392.
Handle: RePEc:nbr:nberwo:9351

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  1. William D. Nordhaus, 2002. "The Health of Nations: The Contribution of Improved Health to Living Standards," Cowles Foundation Discussion Papers 1355, Cowles Foundation for Research in Economics, Yale University.
  2. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
  3. Plutarchos Sakellaris & Dan Wilson, 2000. "The Production-Side Approach to Estimating Embodied Technological Change," Electronic Working Papers 00-002, University of Maryland, Department of Economics.
  4. Adriana Lleras-Muney & Frank R. Lichtenberg, 2002. "The Effect of Education on Medical Technology Adoption: Are the More Educated More Likely to Use New Drugs," NBER Working Papers 9185, National Bureau of Economic Research, Inc.
  5. Hulten, Charles R, 1992. "Growth Accounting When Technical Change Is Embodied in Capital," American Economic Review, American Economic Association, vol. 82(4), pages 964-80, September.
  6. Frank R. Lichtenberg & Donald Siegel, 1989. "The Impact of R&D Investment On Productivity - New Evidence Using Linked R&D-LRD Data," NBER Working Papers 2901, National Bureau of Economic Research, Inc.
  7. repec:umd:umdeco:sakellaris0002 is not listed on IDEAS
  8. Bartel, Ann P & Lichtenberg, Frank R, 1987. "The Comparative Advantage of Educated Workers in Implementing New Technology," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 1-11, February.
  9. Zvi Griliches & Frank R. Lichtenberg, 1984. "R&D and Productivity Growth at the Industry Level: Is There Still a Relationship?," NBER Chapters, in: R & D, Patents, and Productivity, pages 465-502 National Bureau of Economic Research, Inc.
  10. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-83, August.
  11. Charles R. Hulten, 1992. "Growth Accounting When Technical Change is Embodied in Capital," NBER Working Papers 3971, National Bureau of Economic Research, Inc.
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Cited by:
  1. Chee-Ruey Hsieh & Ya-Ming Liu & Chia-Lin Chang, 2013. "Endogenous technological change in medicine and its impact on healthcare costs: evidence from the pharmaceutical market in Taiwan," The European Journal of Health Economics, Springer, vol. 14(2), pages 287-295, April.
  2. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1049-1090, August.
  3. Papageorgiou, Chris & Savvides, Andreas & Zachariadis, Marios, 2007. "International medical technology diffusion," Journal of International Economics, Elsevier, vol. 72(2), pages 409-427, July.
  4. Frank R. Lichtenberg & Gautier Duflos, 2008. "Pharmaceutical innovation and the longevity of Australians: a first look," NBER Working Papers 14009, National Bureau of Economic Research, Inc.
  5. Van Bui & Michael Stolpe, 2010. "The impact of new drug launches on the loss of labor from disease and injury: evidence from German panel data," International Journal of Health Care Finance and Economics, Springer, vol. 10(4), pages 315-346, December.
  6. Chris Papageorgiou & Andreas Savvides & Marios Zachariadis, . "International Medical R&D Spillovers," Departmental Working Papers 2004-03, Department of Economics, Louisiana State University.

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