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Benefits and costs of newer drugs: an update

Listed author(s):
  • Frank R. Lichtenberg

    (Columbia University and National Bureau of Economic Research)

In previous work, we found strong evidence to support the hypothesis that the replacement of older drugs by new drugs resulted in reductions in total medical expenditures. In this study, we update and extend our previous study of the effect of drug age-years since FDA approval-on total medical expenditure, in several respects: (1) the unit of analysis is a medical condition, rather than a prescription; (2) the sample is much larger, including data for 3 years, rather than 1 year; (3) we obtain estimates for the Medicare population as well as for the entire population; and (4) within the Medicare population, we examine the effect of drug age on Medicare expenditure as well as on expenditure by all payers. The estimates indicate that, in the entire population, a reduction in the age of drugs utilized reduces non-drug expenditure 7.2 times as much as it increases drug expenditure. For example, reducing the mean age of drugs used to treat a condition from 15 years to 5.5 years is estimated to increase prescription drug spending by $18 but reduce other medical spending by $129, yielding a $111 net reduction in total health spending. Most of the savings are due to reductions in hospital expenditure ($80) and in physician office-visit expenditures ($24). In the Medicare population, a reduction in the age of drugs utilized reduces non-drug expenditure by all payers (i.e. Medicare and various forms of Medicare supplemental insurance, Medicare for dually eligible individuals and Medicare beneficiaries' out of pocket payments) 8.3 times as much as it increases drug expenditure; it reduces Medicare non-drug expenditure 6.0 times as much as it increases drug expenditure. About two-thirds of the non-drug Medicare cost reduction is due to reduced hospital costs. The remaining third is approximately evenly divided between reduced Medicare home health care cost and reduced Medicare office-visit cost. We also show that Medicare enrollees with private prescription drug coverage tend to use newer drugs than those without such coverage: the mean age of drugs used by Medicare enrollees with private Rx insurance is about 9% lower than the mean age of drugs used by Medicare enrollees without either private or public Rx insurance. Copyright © 2007 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 28 (2007)
Issue (Month): 4-5 ()
Pages: 485-490

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Handle: RePEc:wly:mgtdec:v:28:y:2007:i:4-5:p:485-490
DOI: 10.1002/mde.1355
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