Assessing the Impact of Pharmaceutical Innovation: A Comprehensive Frameworkby

Jack A. Meyer, Ph.D.President, New Directions for Policy

About the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i

About New Directions for Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i

Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ii

Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Key Facts and Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

The Increase in the Importance of Chronic Illness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

The Aging of the Population . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

The Evidence on the Impact of Pharmaceutical Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Traditional Approach to Research: Focus on Health Status and Health Care Spending . . . . . . . . . . . . . . . . . . . . . . . . .8

Analyses of New Technologies and Innovations in Pharmaceuticals: Health and Economic Effects . . . . . . . . . . . . . . . . .9

New Approach: Aggregate Studies Across All Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Enhanced Health Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Evaluating the Impact of All New Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

International Comparisons of the Value of Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Comparing Pharmaceutical Benefits Among U.S. Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Looking Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Reductions in Overall Health Care Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Macro-Analyses of the Impact of New Drugs on Overall Health Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Increased Economic Growth and Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Stimulating Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Enhancing Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Putting These Findings Together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

© February, 2002. New Directions for Policy

Table of Contents

About the AuthorJack A. Meyer, Ph.D., is the founder and president of New Directions for Policy. Dr. Meyer has conducted policy analyses

and directed research on health care issues for several major foundations as well as federal and state government and thebusiness sector. He has led projects developing policy options for reforming the overall health care system and directedresearch on employers’ innovations in health care purchasing. Many of these projects have highlighted new strategies forextending health insurance coverage to the uninsured. Dr. Meyer is the author of numerous books, monographs, andarticles on topics including health care, welfare reform, and policies to reduce poverty.

About New Directions for PolicyNew Directions for Policy (NDP) is a Washington-based organization that assists purchasers and providers of health care,

and government through policy research and analysis, strategic planning, and program evaluation. NDP’s purposes are topromote more effective operation of the health care system, and to aid the development of sound public policy on healthcare and social welfare issues. NDP analyzes the forces driving health care spending, designs innovative strategies toimprove financing and delivery systems, and evaluates reforms to extend health coverage to the uninsured.

AcknowledgementsThe author would like to thank Larry Stepnick and Todd Kutyla for their valuable assistance in preparing this report.

Richard Levy of the National Pharmaceutical Council offered helpful advice throughout the project.

This paper was produced under a grant from the National Pharmaceutical Council (www.npcnow.org).

i

Executive Summary

The key finding in this report is that new drugs areyielding a wide range of benefits to our society thatmore than justify the investment needed to

produce them. This report develops a comprehensiveframework for assessing the value of pharmaceuticalinnovation that encompasses both the cost of bringingnew products to market and the direct and indirectbenefits. These benefits include improved patient health,cost reductions in the health care system, and a moreproductive, higher-growth economy. New Directions forPolicy reviewed numerous studies — most of themconducted during the last few years — and synthesizedand assessed the results and conclusions from thisresearch. Based on our thorough review, we present thefollowing specific findings:

• Even the most conservative estimate of the value ofextending life, when juxtaposed with the associatedcosts, shows a very large payback on the investmentsin new drugs. Benefit-cost ratios that account for thevalue of leisure and other “non-market” benefits, inaddition to the contribution to the economy made bypeople who live longer, are very large and can be inexcess of 100 to 1.

• The number of hospital days declined most rapidly fordiagnoses with the greatest increase in the number ofdrugs prescribed and the greatest use of new drugs.The drop in outlays for hospital care is more than threetimes the value of the associated increase inpharmaceutical spending.

• Changes in the medical treatment of heart attacks areresponsible for 55 percent of the 30 percent decline inmortality associated with heart attacks that occurredover a twenty-year period. Pharmaceuticals alone wereresponsible for over one-quarter of the overallreduction in mortality — by far the single mostimportant factor explaining the decline.

• Increased life expectancy has had a major positiveimpact on U.S. economic growth. Pharmaceuticalinnovation has contributed to the gain in lifeexpectancy, and has therefore helped strengthen oureconomy.

• Most of the increase in pharmaceutical spending thathas occurred in recent years is attributed to increases inthe volume of drugs taken by patients. Inflation in theprices of existing drugs accounts for only a very smallproportion of the increase, and in some cases, hasmade no contribution to rising outlays for drugs. Theprice effect associated with the introduction of newdrugs has also made a relatively small contribution tothe total spending increase.

• Volume increases are comprised of a greaterproportion of people in the population who are usingpharmaceuticals, more prescriptions per person, andmore days of use per prescription. The use ofpharmaceuticals to treat asthma illustrates the waythese components of increased use can reduce under-care, improve health outcomes, and reduce hospitaland emergency room use.

• A few “priority” health conditions, such ascardiovascular disease, pulmonary disease, cancer, anddiabetes, account for about three-fourths of all deathsin the U.S. Similarly, a few chronic conditions such asasthma, hypertension, and diabetes account for a verylarge share of total health care spending.Pharmaceuticals can be an integral part of diseasemanagement programs that help patients control theirsymptoms, reduce the incidence of flare-ups, and leadhealthy and productive lives.

ii

Framework

The purpose of thisreport is to develop anew framework for

assessing the impact ofpharmaceutical innovationon health status, healthexpenditures, and oureconomy. The goal is todevelop a comprehensiveapproach to analyzing boththe costs and benefits ofpharmaceutical innovationsin order to determinewhether society is getting agood return on itsinvestment in new drugs.

The current debate is much too narrow. It focusesmainly on the cost of drugs and largely ignores thebenefits. When benefits are included in the analysis, theyare measured quite restrictively. The question mostfrequently asked under the “conventional wisdom” is,“Do drugs cost too much?” But this is a hard question toanswer in a vacuum — outlays for drugs must be assessedin terms of what benefits they produce. The frameworkdeveloped here looks at outlays for drugs as a socialinvestment and therefore seeks to determine the returnthat such an investment yields, and whether the returnjustifies the outlay.

An appropriate framework for evaluating the yield oninvestments in new drugs would include a comparison ofoutlays for drug innovation with the following types ofbenefits. First, to the extent that new pharmaceuticalsimprove patients’ health, there will be savings within thehealth care system. For example, if the introduction ofnew products helps patients to fully recover from acutecare episodes and/or manage chronic illnesses so that theyhave fewer flare-ups and complications, there will besavings in the form of fewer visits to the emergency room,fewer or shorter stays in the hospital, and less physiciancare. If a new, more expensive drug replaces an olderdrug, but that new drug improves medical managementof diseases and chronic illnesses, the savings need to bejuxtaposed with the extra cost. A new drug, for example,may be more effective in improving a medical condition,

have a dosage schedule thatfacilitates better patientcompliance (e.g., once a dayversus four times a day), orhave fewer side effects.Each of these characteristicscould yield better healthoutcomes and savingsthroughout the health caresystem.

Second, pharmaceuticalR&D may help patients bemore active and productive.This could yield benefitsoutside the health care

system. These benefits might take the form of reducedabsenteeism from work, greater labor productivity, andlower employee turnover. These benefits would berealized by employers and employees in the form ofhigher profits and higher wages.

Third, pharmaceutical innovation helps people livelonger. Added years of life generate both costs andbenefits for society. On balance, this report will show that the benefits of pharmaceutical innovation outweighthe costs.

The effects of an aging population will reach a “take-off” stage at the end of this decade as the baby-boomgeneration enters their retirement years. The number ofworkers supporting each retiree will fall from more thanthree to about two over the next 20 to 30 years. Asdocumented below, chronic illnesses have become farmore important in the overall health care picture thanused to be the case. As demographic trends unfoldagainst this backdrop, the critical challenge for our societywill be to find effective ways of managing chronic illnessand helping elderly people with disabilities stay active andremain in the community. This involves developingalternatives to traditional institutional care. Finding waysto help older workers remain on the job, or return towork following a complication of a medical condition, willalso take on great importance.

1

Yield on Society’s Investment in New Drugs• Savings within the health care system• Savings outside the health care system• Savings from added years of life

A new drug may be more effective in

improving a medical condition, have a

dosage schedule that facilitates better

patient compliance, or have fewer side

effects. Each of these characteristics could

yield better health outcomes and savings

throughout the health care system.

Pharmaceuticals will be a key component of diseasemanagement programs, particularly in the case of chronicillness and disability. In assessing their value, it will beimportant to adopt a framework that accounts for suchkey outcomes as living longer, working productively, andmanaging disabilities so that individuals can remain activeand independent. Pharmaceuticals have the potential tocontribute to a lower “dependency ratio” by maintaining alarger pool of working people and by helping non-workerslive independently.

This report broadens the framework for assessing thevalue of pharmaceuticals to include the full range ofpotential benefits from pharmaceutical innovation. Itaddresses the following questions:

1. What is the overall impact of pharmaceutical innovationon the health and functional status of our population?

2. What is the effect of this innovation on life expectancy?

3. What is the effect onhealth care spending?

4. What is the effect on theeconomy, including suchpotential outcomes aschanges in days lost from work and laborproductivity?

These issues rarely enter the public debate about thevalue of pharmaceuticals. Yet, they may be crucial to adetermination of the cost-effectiveness of innovation in thisfield. This report discards the narrow discussion aboutwhether particular drug prices are “too high” and focusesinstead on the more comprehensive question of whetherinvestments in pharmaceutical research and innovationhave a positive payoff for society. The answer to thisquestion requires an objective review of the costs andbenefits (both direct and indirect) of this outlay.

The development of a comprehensive and long-termperspective for evaluating drug innovation is challenged bythe fact that third-party payers frequently face very short-term, tight budget constraints. This makes it difficult forthem to factor in potential savings that may occur outsideof the pharmacy budget over extended periods of time.States purchasing drugs under Medicaid, HMOs, andhospitals not only work within tight budgets, but alsofrequently examine each component of the health care

budget within “closedbins” that ignore cross-sector spillover effects. Thismay fail to capture somekey sources of savings andbias the results againstinnovation.

2

In assessing [the value of

pharmaceuticals], it will be important to

adopt a framework that accounts for such

important outcomes as living longer,

working productively, and managing

disabilities so that individuals can remain

active and independent.

Key Facts and Trends

Outpatient pharmaceutical spending in the U.S. totaled$117 billion in 2000, or about 1.2 percent of our grossdomestic product.1 Outpatient drugs accounted for about 9percent of the health care dollar in 2000. Drug spendingincreases have outpaced spending on other health careservices in recent years (e.g., there was a 16.9 percentincrease in drugs in 1999 compared with a 3.7 percentincrease for hospital care and a 6.0 percent increase forphysician services).2 Drugs are the most research-intensive

industry in the U.S. As shown in Figure 1, R&D as a percentof sales amounts to 17.0 percent in domestic research-based pharmaceuticals (15.6 percent in global research-based pharmaceuticals). The former figure is about two-thirds higher than the corresponding proportion incomputer software, more than three times higher than intelecommunications, and more than four times the averagefor all U.S. industries (excluding drugs and medicine).

Figure 1

Research Intensity of Various Industries, 2000Industrial Sector R&D as a % of Sales

Research-based pharmaceutical companiesa

Domestic R&D 17.0%

Global R&D 15.6%

Industrial Sector Comparisonb

Drugs & Medicinec 12.8%

Computer Software & Services 10.5%

Electrical & Electronics 8.4%

Telecommunications 5.3%

Aerospace & Defense 3.8%

All industries excluding “Drugs & Medicine” 3.9%

a “Research-based pharmaceutical companies” based on ethical pharmaceutical sales and ethicalpharmaceutical R&D only, as tabulated by PhRMA.b Standard and Poor’s Compustat – 4 digit SIC Codes.c “Drugs and Medicine” based on total R&D and sales for companies classified within the “Drugs &Medicine” sector, as tabulated by Standard & Poor’s Compustat (includes both research-based and non-research-based companies).Source: PhRMA, Pharmaceutical Industry Profile 2001, Figure 2-3, based on PhRMA calculations andStandard and Poor’s Compustat.

A recent study by Dubois and colleagues disaggregatedthe overall trend in drug spending. They concluded thatprice inflation for existing drugs was just one of six factors— and for most therapeutic categories the least importantfactor — explaining the increase.3 The factors are listedbelow:

1. Growing prevalence of identified and treated medicalconditions;

2. Demographic shifts toward an older population;

3. Changes in the mix of existing therapies toward morecostly agents;

4. Increased quantity of drugs per patient;

5. Introduction of new therapeutic agents; and

6. Inflation of existing product prices.

1 Data from the Center for Medicare and Medicaid Services, “National Health Care Expenditures Projections (2000-2001).”2 Ibid.3 Dubois, R. et al. “Explaining Drug Spending Trends: Does Perception Match Reality?” Health Affairs, 2000; 19(2): pp. 231-9. 3

Figure 2

Volume Accounts for Much of the Spending Changesfor Categories of Drugs

Total % Change in Spending Price Factors Volume Factors for Drugs Treating Condition

Asthma 11 83 94

Hormone Replacement 63 156 219Therapy

Antidiabetics 21 73 94

Antihyperlipidemics -1 81 80

Antidepressants 19 66 85

Antihistamines 14 53 67

Gastrointestinal 3 40 43

Asthma and hormone replacement therapy analyses use data from 1995 and 1998; all other categories use data from 1994 and 1997.Source: Dubois, R. et al. “Explaining Drug Spending Trends: Does Perception Match Reality?” Health Affairs, 2000; 19(2): pp. 231-9.

The study by Dubois and colleagues illustrates howvolume increases may be linked to improved preventivecare. As shown in Figure 2, price factors accounted for 11percentage points of the total growth in asthma spending,while volume factors accounted for 83 percentage points.The number of patients being treated for asthmaincreased, and the use per patient rose as well. Forexample, the increase in the number of asthma patientsbeing treated accounted for about a quarter of thespending growth. In addition, theproportion of patients with asthmawho used at least one prescription forinhaled corticosteroids increased from24 percent to 40 percent over thisperiod. The percent of patients usingthree or more canisters of medicationduring a year’s time doubled, from 9percent to 19 percent.

This increase in pharmaceutical management of asthmawas associated with a decline in asthma-related hospitaladmissions. While it is difficult to establish cause-and-effectwith certainty, hospital admissions by patients with asthmadeclined by 35 per 1,000 patients over the period andemergency room visits declined by 31 per 1,000 patients.These savings helped to offset the increase in spending forasthma drugs. The increases in overall spending forpharmaceuticals to treat asthma suggest not that there is

a problem with increased drug prices,but that increased volume due toappropriate disease management isdriving spending and leading tobetter preventive care. This example,then, also illustrates the type ofbenefits and cost savings that can berealized when one looks at drugspending increases in a broaderframework.

Increased volume due to

appropriate disease

management is driving

spending and leading to

better preventive care.4

Examining trends over several categories of drugs for athree-year period, the authors found that “although theaverage transaction price rose in every case but one, theimpact on the rise in drug spending was greatly exceededby that of growth in medication volume. The relative ratiosof increased volume to increased price ranged from a lowof 2.5:1 for hormone replacement therapy to more than10:1 for gastrointestinal agents and lipid-lowering drugs.”

Figure 2 shows that for several disease and productcategories, the effect of volume factors on spendingincreases greatly exceeded price factors. In the case ofantidepressants, for example, the overall increase inspending over a three-year period was 85 percent,comprised mostly of the various components of volumeeffects. The price inflation of existing products onlyaccounted for 7 percentage points of the 85 percentincrease, and the price impact of the introduction of newproducts accounted for only 2 percentage points.

The Increase in theImportance of Chronic Illness

An estimated 125 million Americans suffered fromchronic illness in 2000, 20 million more than thenumber forecast for this year in 1996. This figure isprojected to reach 157 million in 2020, when one infour Americans will be living with multiple chronicconditions.4 In 2000, medical costs for people withchronic conditions totaled $774 billion. A person witha chronic condition has, on average, medicalexpenditures of $6,032 per year ($16,245 if theperson also has a functional limitation). These figurescompare to outlays of only $1,105 for a person ingood health.5 Compared to people suffering only fromacute health episodes, the annual medical costs perperson were more than double for people with onechronic condition, and almost six times higher forpeople with two or more chronic conditions.

In fact, four major chronic conditions —cardiovascular disease, cancer, chronic obstructivepulmonary disease, and diabetes — account for almostthree-fourths of all U.S. deaths. Pharmaceuticalproducts play an important role in the treatment andmanagement of each of these four conditions. Manyindividuals suffering from these chronic conditions areamong the top 1 percent of patients whose healthcare outlays account for 30 percent of all health carespending, while the bottom 50 percent of patientsgenerate combined outlays that account for only 3percent of spending.6 This disparity in spending callsfor the placement of a high priority and theconcentration of considerable effort on determiningbetter ways to manage the illnesses and chronicconditions of the relatively small segment of thepopulation who are critically and/or chronically ill.

We have much work to do in this area. A study byShuster and colleagues found that only 60 percent ofpatients received recommended care for chronic illnesswhile 20 percent received contraindicated care.7

Despite the progress noted above, only 27 percent ofpatients with asthma receive an inhaled anti-inflammatory drug to control symptoms.8 Amongwomen over 50 years of age, 38 percent had notreceived a mammogram in the preceding 18 months.9

More than half (54 percent) of Medicare patients withdiabetes did not receive an eye exam by anophthalmologist during a year’s time, and 84 percentdid not receive a Hemoglobin A1c exam — bothstandard practice in avoiding complications ofdiabetes.10

The Aging of the PopulationThe U.S. is facing an aging population. The number

of people aged 65 and over is expected to rise fromabout 36 million today to about 70 million in 2030.The fastest growing segment of this group iscomprised of people 85 years of age and older. Theirshare of the total population is projected to increasefrom 1.4 percent in 1995 to 2.4 percent in 2030 and4.6 percent in 2050 (Figure 3).

The conventional wisdom has held that this trendwill lead to a large increase in health care spendingand a gloomy outlook for the financial stability of theMedicare program. Indeed, the elderly do useconsiderably more health services — including drugs— than do the nonelderly. For example, people 65 to74 years of age use four times as many prescriptionsas those who are between the ages of 19 and 44.11

4 Wertheimer, A., O’Connor, T., Levy, R. The Value of Incremental Pharmaceutical Innovation for Older Americans. Philadelphia: TempleUniversity. 2001.5 Alliance for Health Reform Issue Brief, America’s Most Ignored Health Problem: Caring for the Chronically Ill, June 2001.6 Institute of Medicine, Crossing the Quality Chasm. Washington, D.C. 2001.7 Shuster, M., McGlynn, E., Brook, R. “How Good is the Quality of Health Care in the United States?” Milbank Quarterly, December1998; 76(4): pp. 517-563.8 Ozminkowski, et al. “Cost Implications for the Use of Inhaled Anti-Inflammatory Medications in the Treatment of Asthma.”PharmacoEconomics, September 2000; 18(3): pp. 253-64.9 Stoner, T., et al. “Do Vouchers Improve Breast Cancer Screening Rates? Results from a Randomized Trial.” Health Services Research,1998; 33(1): pp. 11-28.10 Weiner, J., et al. “Variation in Office-Based Quality: A Claims-Based Profile of Care Provided to Medicare Patients With Diabetes.”Journal of the American Medical Association, 1995; 273(19): pp. 1503-8.11 Neuman, T. Improving Prescription Drug Coverage: Opportunities and Challenges for Reform (Testimonybefore the Senate Finance Committee), Henry J. Kaiser Family Foundation, March 2001. 5

Figure 3

An Aging Population Will Put More Pressure on the Health Care System

Going forward, seniors will continueto use more health resources than willthe younger population. But the keyto making our social insurancesystems viable and controlling overallhealth spending hinges on trends indisability, functional limitations, andmost important, rates ofinstitutionalization. New evidence suggests that the gloomyforecasts may need to be revised if recent trends in theincidence of disability continue. A 2001 study by KennethManton and XiLiang Gu found an acceleration in thedecline in chronic disability over the last two decades. From1988 to 1989, the incidence of disability among the elderlydeclined 0.26 percent per year; from 1989 to 1994, thereduction was 0.38 percent per year; and from 1994 to1999, it was 0.56 percent per year (see Figure 4).12 Thesestatistics are reinforced by new findings reported by DavidCutler, who concludes that several measures of disability —including overall health, institutionalization, dependencyrates, and functional impairment — are improving for theelderly. For example, whereas 25 percent of the elderlywere dependent in 1984 (as measured by ability to performactivities of daily living), only 19 percent were dependent in1999. One survey of functional impairment found a rapiddecline of 3.2 percent per year.13

Cutler also notes that there was asharp increase in the use ofnonsteroidal anti-inflammatory drugsover the past three decades, andsuggests that this could account forwhy disability for persons witharthritis has fallen so dramatically inrecent years. Similarly, he observes

the connection between the marked rise inantihypertension medication in the 1970s and early 1980sand the decline in the incidence of strokes in recentdecades.14 Manton and Gu also found a substantialreduction in the use of institutional care among the elderly.The proportion of those 65 years of age and older thatwere in an institution fell from 6.8 percent in 1982 to 6.1percent in 1989, and to 4.2 percent in 1999 (Figure 4). Thestudy found that there were 400,000 fewer nursing homestays in 1999 than there would have been had the 1994prevalence of disability persisted. Since nursing homes areso much more costly than other living arrangements, thisreduction translates into savings of $18.9 billion. Theauthors also found that the decline in the incidence ofdisability is large enough to make a major difference in theprospects for the Medicare Trust Fund. They conclude thatthe relative rate of improvement from 1994 to 1999 wasconsiderably faster than the rate needed to preserveMedicare solvency through 2070.15

25%

20%

15%

10%

5%

0%

2000 2010 2020 2030 2040 2050

% pop. over 65

% pop. over 85

Source: U.S. Census Bureau Projections.

12 Manton, K., Gu, X. “Change in the Prevalence of Chronic Disability in the United States Black and Non-Black Population Above Age65, 1982-1999.” Proceedings of the National Academy of Sciences, 2001; 98(11): pp. 6354-9.13 Cutler, D. “Declining Disability Among the Elderly.” Health Affairs, 2001; 20(6): pp. 11-27.14 Ibid.15 Manton, K., Gu, X. 2001.

6

Reduction [in nursing

home stays] translates into

savings of $18.9 billion.

Figure 4

Decline in Disability and Institutionalization of the ElderlyAverage annual decline in incidence of disability

1988-89 0.26%

1989-94 0.38%

1994-99 0.56%

Proportion of elderly in an institution

1982 6.8%

1989 6.1%

1999 4.2%

Source: Manton & Gu, 2001.

According to studies by Mantonand Pardes, declines in disabilityrates are consistent with theintroduction of new pharmaceuticaltechnologies due to the maturationof major areas of biomedicalresearch (for example, osteoporosis,stroke, Parkinson’s disease, andcongestive heart failure).16 Mantoncited the use of hormonereplacement therapy, which hasincreased steadily since 1982, as an example. Over 10million women are now taking this therapy, whichsubstantially reduces the incidence of osteoporosis, a majorcause of disability in older women. If these trendscontinue, the key challenge in the new century will be tomanage the illnesses of seniors living in the community —

at home, with relatives, or in assistedliving facilities — as well as nonelderlyadults and children with chronicillnesses and functional impairments.These will be the “high-cost users”who fill emergency rooms andcomprise a large share of hospitalstays. In many cases, their institutionalcare can be avoided or shortenedthrough appropriate diseasemanagement. Prescription drugs are

an important element of this strategy. In evaluating howpharmaceuticals contribute to disease management forchronically or critically ill patients, it is important tounderstand the costs and benefits of pharmaceuticalinnovation.

The proportion of those 65

years of age and older that

were in an institution fell

from 6.8 percent in 1982 to

6.1 percent in 1989, and to

4.2 percent in 1999.

16 Pardes H., et al. “Effects of Medical Research on Health Care and the Economy.” Science, 1999; 283(5398): pp. 36-43. 7

The Evidence on the Impact ofPharmaceutical Innovation

This section reviews research findings on the impact ofpharmaceutical R&D and the use of new drugs on healthstatus, overall health care expenditures, and the economy.It begins with a brief review of the more conventionalapproach to this research — studies that evaluate theimpact individual drugs or classes of drugs have on healthstatus and spending to treat specific conditions. It thenhighlights findings from studies that examine the broaderhealth and economic effects of specific medicalinnovations. Finally, this review looks at a relatively newapproach to research — one that evaluates from anaggregate perspective the impact of all new drugs.

Traditional Approach to Research:Focus on Health Status and HealthCare Spending

Much of the research on the impact of drugs highlightsthe benefits of individual drugs or classes of drugs forspecific medical conditions. Working within thisframework, researchers have found that many drugsappear to be quite effective in enhancing health status andreducing costs. For example, studies have found thatspecific types of drugs have been able to enhance healthstatus while simultaneously reducing health care costs:

• Use of angiotensin-converting enzyme (ACE) inhibitorshas been shown to reduce mortality by 16 percent inpatients with congestive heart failure. The same studydocumented a $9,000 reduction in per-patient hospitalcosts over a three-year period.17

• In a study examining treatments for congestive heartfailure, Humana Hospitals found that a year-long diseasemanagement program for roughly 1,100 patients withcongestive heart failure resulted in a net $9.3 millionreduction in health care costs. This disease management

program also enhanced patients’ ability to performactivities of daily living by 15 percent and reduced thedeath rate from the expected 25 percent to 10 percent.The program relied extensively on pharmaceuticals; drugcosts jumped by 60 percent, but these increasedexpenditures were more than offset by a 78 percentdecline in hospital costs.18

• New drugs have helped reduce the mortality rate forAIDS and HIV patients significantly, while simultaneouslyreducing the need for hospitalization. One study foundthat providing patients with full access to new AIDSdrugs saved the Department of Veterans Affairs $18million in treatment costs.19

• A study sponsored by the Agency for HealthcareResearch and Quality (AHRQ) found that greater use of ablood-thinning agent could prevent 40,000 strokes eachyear, saving $600 million annually in health care costs.The average annual cost of the drug and monitoring was$1,025, compared to the $100,000 lifetime cost ofstroke treatment.20

• Patients treated with beta-blocker drugs after a heartattack are 40 percent less likely to die in the two-yearperiod following the heart attack than are heart attackvictims who do not receive these drugs.21

Other studies have also documented cost reductionsassociated with the use of specific drugs. For example, astudy sponsored by the National Institutes of Health (NIH)found that prompt use of tissue plasminogen activator(t-PA) reduced the costs of treating a stroke patient by anaverage of $4,400 by reducing the need forhospitalization, rehabilitation, and nursing home care.Greater use of this medicine could save the health caresystem more than $100 million a year.22

17 The SOLVD Investigators. “Effect of Enalapril on Survival in Patients with Reduced Left Ventricular Ejection Fractions and Congestive HeartFailure.” New England Journal of Medicine, 1991; 325(5): pp. 293-302.18 “Provide Education about Congestive Heart Failure and Pump Up Your Savings,” Managed Healthcare, 1998; 8(4).19 Rahman, A., et al. “Inversion of Inpatient/Outpatient HIV Service Utilization: Impact of Improved Therapies, Clinician Education, and CaseManagement in the U.S. Department of Veterans Affairs.” F.D.C. Reports, July 20, 1998.20 Matchar, D., et al. Secondary and Tertiary Prevention of Stroke Patient Outcomes Research Team (PORT) Final Report – Phase I, AHRQ Pub. No.00-N001, Rockville, MD: Agency for Healthcare Research and Quality, June 2000.21 Gottlieb, et al. “Effect of Beta-Blockade on Mortality among High-Risk and Low-Risk Patients after Myocardial Infarction,” The New EnglandJournal of Medicine, 1998; 339(8): pp. 489-497; Levy, R. “What to Tell Patients About the Cost-Benefit of Medications,” Wellcome Trends inPharmacy, January 1993.22 Fagan, S., et al. “Cost-effectiveness of Tissue Plasminogen Activator for Acute Ischemic Stroke. NINDS rt-PA Stroke Study Group,” Neurology,1998; 50(4):883-90; National Institutes of Health, National Institute of Neurological Disorders and Stroke. New Stroke Treatment Likely toDecrease Health Care Costs and Increase Quality of Life. News Release, April 22, 1998.8

A recent review of a series of incremental pharmaceuticalinnovations shows important benefits across a number ofdifferent diseases and chronic medical conditions.Incremental, small changes in dosage form, formulation, ormolecular configuration of pioneer compounds provide thefollowing benefits: 1) fewer side effects; 2) improved drugsafety and effectiveness; 3) greater ease of use, increasingcompliance; and 4) treatments better tailored to individualpatient needs.23 Other benefits accrue when new clinicaluses of existing medications are discovered.

Analyses of New Technologies andInnovations in Pharmaceuticals:Health and Economic Effects

Bringing patients back to good health has beneficialeffects that extend beyond the health care system. Somestudies have found that drugs contribute to greaterproductivity, primarily by reducing lost school and work days.

• Medical costs declined by $822 per employee per yearand absenteeism dropped by nine days when depressedworkers were treated with a range of anti-depressantmedicines. Savings from improved productivity and thereduction in work loss and medical costs far outweighedthe cost of drug treatment.24

• A study showed that a drug for migraine headachessaved employers $435 per employee per month byreducing lost productivity due to migraine headaches; thedrug itself cost $44 per employee per month.25

However, benefits of medical innovations can beexamined even more broadly, encompassing the values oflonger and improved quality of life. In a recent study, DavidCutler and Mark McClellan present findings of a very largepayback from new technology in medicine.26 In four out offive conditions they analyzed — heart attack, low birth-weight, depression, and cataracts — Cutler and McClellanfind the estimated benefit of technological change to bemuch greater than the cost. In the case of breast cancertreatment, the costs and the benefits were found to beroughly equal. The authors claim that “[t]he benefits fromlower infant mortality and better treatment of heart

attacks have been sufficiently great that they alone areabout equal to the entire cost increase for medical careover time.”27

Though the costs of treating both heart attack victimsand low-birth-weight babies have increased considerablyover the last few decades, the life-years added from moreaggressive treatment using advanced technologies,including drugs to control blood pressure and cholesterollevels, more than make up for that cost. Cutler andMcClellan estimate the value of an added life-year to beabout $100,000 (see explanation of valuation of a life-yearon page 15). However, to assess the net gain realized fromthose life-years, the authors also consider the cost of futuremedical care, given that an individual will now live longer,and as a result, will likely use more medical resources inthose added years.

To analyze the benefits of new technology in heartattack patients, the authors use Medicare claims data.Since most elderly and disabled heart attack survivors donot work after the attack, the authors assume that thereare no productivity benefits from increased longevity. Theysubtract the value of the basic medical and non-medicalcost of living from the estimate of the value of a life-year($100,000). This yields a figure of $70,000 for the netpresent value of technological innovation. In contrast thecosts of treatment increased about $10,000. Therefore, thenet gain of technological advances in the treatment ofheart attacks from 1984 to 1998 is about $60,000 perheart attack ($70,000 in benefits versus $10,000 inincreased costs).

Analyzing data on low-birth-weight babies, David Cutlerand Ellen Meara found that the treatment costs increasedsharply over the 1950 to 1990 period, primarily becausethere was little that could be done for these infants a halfcentury ago. With special ventilators and other newtechnology, the present value of lifetime treatment cost perchild rose to $40,000 by 1990. The authors incorporate thefact that babies surviving will both work (unless they aredisabled, which was accounted for in the analysis) andconsume resources. Netting out the offsetting forces(contributions to growth and productivity from work, onthe plus side, and medical resources consumed, on theminus side), they find that the ratio of benefits to costs is astartling 6 to 1, or $200,000 per low-birth-weight infant.28

23 Wertheimer, A., Levy, R., O’Conner, T. “Too Many Drugs? The Clinical and Economic Value of Incremental Innovations.” Reasearch In HumanCapital and Development: Investing in Health: The Social and Economic Benefits of Health Care Innovation, 2001; 14: pp. 77-118.24 Rizzo, J., et al. “Labor Productivity Effects of Prescribed Medicines for Chronically Ill Workers,” Health Economics, 1996; 5(3): pp. 249-65.25 Legg, R., et al. “Cost-effectiveness of Sumatriptan in a Managed Care Population,” American Journal of Managed Care, 1997; 3(1): pp. 117-22.26 Cutler, D., McClellan, M. “Is Technological Change In Medicine Worth It?” Health Affairs, 2001; 20(5): pp. 11-29.27 Ibid.28 Cutler, D., Meara, E. “The Technology of Birth: Is It Worth It?” Frontiers in Health Policy Research. vol. 3, ed. A. Garber. Cambridge, MA: MITPress, 2000.

9

New drugs to treat depression have also been shown tobe cost-effective when a comprehensive framework formeasuring costs and benefits is adopted. Treatment withfluoxetine, a selective serotonin reuptake inhibitor (SSRI)was found to involve total direct health care costs of$1,970 over a six-month period. Treatment withimipramine and desipramine, two older products (tricyclics),involved costs of $2,100 and $2,400, respectively.29

Furthermore, SSRIs have fewer side effects and a greaterlikelihood that patients will comply with the course oftreatment. This means that in addition to having somewhatlower direct costs, SSRIs will yield greater offsets to cost inthe form of lower co-morbidity, lower rates ofhospitalization, and simplified follow-up outpatient care.

A similar study by Professor Ernst Berndt found that theshift from psychotherapy and tricyclic medications (oldertechnology) to selective serotonin reuptake inhibitors(SSRIs) was accomplished at virtually no net cost.Furthermore, SSRIs have lower “drop-out rates” and fewerside effects than other drugs, and they cost patients lessthan psychotherapy. Berndt and colleagues found that thistreatment substitution was able to control the symptoms(i.e., achieve remission) of mental illness for about 20percent less in outlays.30 Drawing upon research findings inthe literature, Cutler and McClellan estimate that theoverall value of spending less time depressed is more thansix times the cost of treating depression.31

A new study by Wertheimer, Levy, and O’Conner showsthat incremental innovations across a wide variety of drugscan yield clinical and economicvalue. Drugs in the sametherapeutic class differ in theirtherapeutic profile, metabolism,adverse effects, dosing schedules,delivery systems, and otherfeatures. The availability of abroad range of medicines enablesphysicians to treat with precisionthe individual needs of diversepatients and provides optionswhen the first agent used iseither ineffective or not tolerated.In fact, many of the major classes

of drugs in current use owe their overall therapeuticeffectiveness and clinical significance to importantmodifications in the first generation of drugs.32 Forexample, third-generation antihistamines, developed fromthe active ingredients of the second-generation agents,retain the activity of the parent compound but withimproved tolerability, improved pharmacokinetics, fewerside effects, and greater safety. In another example,cephalosporin antibiotics are now available in fourgenerations of agents, each providing certain benefits thatmight be missing in the prior version. Fourth-generationagents, for example, have broad-spectrum gram-negativeand gram-positive activity comparable to that of first-generation agents. But the newest agents give physiciansthe ability to tailor treatment to combat several differenttypes of infections, the availability of injectable, topical,and oral dosage forms, and a choice between short-actingand long-acting agents, depending on the nature of theinfection, including bacterial strains heretofore resistant toexisting antibiotics.33

Cutler and McClellan’s evidence constitutes a powerfulargument for technological advancement in the care ofacute conditions. But these types of advances intechnology alone are not the answer to the problem ofrising health care costs. For those suffering from seriousconditions — low-birth-weight babies and adults withheart disease, for example — technology certainly providesthe most cost-effective treatment. However, never to haveto treat a chronic or acute condition in the first place is stillthe least expensive option. While encouraging growth in

the area of medical technologyto treat acute conditions, it isalso important to see howmedical innovation can helpmaintain a commitment toprimary and preventive care. Wemust continue to use diseasemanagement for chronicconditions and preventive care,even if the effects are not assensational as those of life-saving technologies for acuteconditions.

The availability of a broad range

of medicines enables physicians to

treat with precision the individual

needs of diverse patients and

provides options when the first

agent used is either ineffective or

not tolerated.

29 Wilde, M., Barfield, P. “Fluoxetine: A Pharmacoeconomic Review of Its Use in Depression.” PharmacoEconomics, 1998; 13(5): pp. 543-61.30 Berndt, E., et al. “The Medical Treatment of Depression, 1991-1996: Productive Inefficiency, Expected Outcome Variations, and Price Indexes.”NBER Working Paper no. 7816; Berndt, E., et al. “Price Indexes for Acute Phase Treatment of Depression.” Medical Care Output and Productivity,ed. D. Cutler, E. Berndt.31 Cutler, D., McClellan, M., 2001.32 Wertheimer, A., Levy, R., O’Connor, T. 2001.33 Ibid.10

It is also important to note that some drugs may be cost-effective even though they do not result in actual savings.In other words, the extra cost associated with the newdrugs might not be fully offset by cost reductionselsewhere in the health care system, meaning that totalcosts increase. But if the extra costs are more than offsetby other benefits, these new drugs will still be cost-effective. For example, second-generation pharmaceuticalsused in the treatment of diabetes have several advantagesover the first-generation agents in this class. A study of5,000 Medicaid patients determined that the addition ofthe new agents was correlated with an overallimprovement in the outcome of drug therapy and acorresponding decrease in hospital and nursing home costsfor diabetic patients. Yet, drug expenditures increased forpatients who used the new agents, since these drugs aremore expensive than the first-generation agents. The netresult was that total expenditures were unchanged.Although overall costs were not reduced, the addition ofthese incremental improvements resulted in a higher levelof glycemic control without increasing costs.34 Thus, thisinnovation did not lead to total cost savings, but whenbenefits are factored in, the use of the second-generationproduct is shown to be cost-effective.

In another example, the Scandinavian SimvastatinSurvival Study found that using the drug simvastatin fortreatment of cardiac patients increased drug spending by$11 million but reduced hospital admissions by one-thirdand hospital costs by $8 million among the 2,221 studysubjects.35 A more recent study of these cholesterol-lowering drugs established that they reduced the risk of aheart attack or stroke by one-third. In the world’s largeststudy of people at high risk for these conditions,simvastatin, or Zocor, was shown to be much morepowerful than the popular antioxidant vitamins C, E, andbeta-carotene, previously thought to protect the heart. Thestudy, conducted by a British team of researchers led by Dr. Rory Collins of Oxford University, involved 20,000participants who were followed over five and a half years.Dr. Collins said that “statins are the new aspirin,” and thatif 10 million high-risk patients started taking statins,50,000 deaths would be prevented each year.36

34 Ibid.35 “Cholesterol Pill Linked to Lower Hospital Bills.” New York Times, March 27, 1999.36 Altman, L. “Cholesterol Fighters Lower Heart Attack Risk, Study Finds.” New York Times, November 14, 2001.

11

Cost Savings versus Cost-EffectivenessThe fact that a drug adds to overall health care costs does not mean that it should not be used. The key issue is

whether the increased costs are justified by the benefits produced by the drug. In the case of statins, discussed onpage 11, it appears that by reducing the number of acute cardiac events, the drug produces quality-of-life benefitsthat justify the increase in overall health care costs.

This example illustrates an important distinction — some drugs may actually reduce overall health care costs andthus produce cost savings. Other drugs may raise overall health care costs while simultaneously producing otherbenefits, such as reductions in mortality or enhanced productivity or health status, that are deemed to be “worth” the additional cost. (A determination of “worth” is usually made by comparing the drug to other potentialinterventions and finding that these alternatives produce fewer benefits for the same cost and/or the same benefits athigher cost.) Both of these types of drugs are said to be “cost-effective”— in other words, cost-effectiveness does notnecessarily imply cost savings. Of course, some drugs may raise costs while producing fewer benefits than alternativetreatments — these drugs are not considered to be cost-effective.

Finally, technology assessment can help avoid the spreadof technology that generates costs exceeding benefits. Inthe extreme case, effective technology assessment canavoid “flat-of-the-curve medicine,” in which treatmentshave high costs and virtually no benefits. As explained byVictor Fuchs, “When assessment catalyzes theabandonment of interventions whose risks exceed theirhealth benefits, it can lower the cost of health carewithout sacrificing its quality.”37

Single-drug studies, taken as a whole, can shed somelight on, but cannot definitively answer, the more generalquestion of the overall impact of new drugs. In fact,researchers recently attempted to address this questionthrough a meta-analysis of multiple single-drug studies.Peter Neumann of the Harvard School of Public Health andseveral colleagues evaluated 228 published cost-utilityanalyses of specific drugs. But their findings, whileinformative, are not able to answer the question as towhether, in general, pharmaceutical innovation and theincreased use of new drugs produces benefits — enhancedhealth status, reduced health care costs, and/or enhancedproductivity — that are greater than the incremental costsof the drugs themselves. Rather, their conclusion is that“some drugs do save money or are cost-effective, butthese determinations depend critically on the context inwhich the drug is used and the intervention with which itis compared.”38

New Approach: AggregateStudies Across All Drugs

Thus, to really understand the overall impact ofpharmaceutical research, including the introduction of newdrugs, we need studies that examine the aggregate impactof drugs. Fortunately, over the last five years, a growingbody of research has emerged that takes this veryapproach.

In this section, we review the evidence suggesting that,in aggregate, the introduction of new drugs has yieldedsubstantial increases in health status and economic growth,along with significant reductions in overall health care coststhat far outweigh any increase in costs from the drugsthemselves. These studies do seem to suggest that newdrugs are “worth it.” The remainder of this sectionevaluates each of the key areas of improvement — healthstatus, overall health care costs, and economicgrowth/productivity.

Enhanced Health StatusA number of aggregate studies have shown that the

introduction of new drugs has made a significantcontribution to lowering mortality associated with heartattacks. A 1997 study, conducted by David Cutler ofHarvard University and the National Bureau of EconomicResearch (NBER), Mark McClellan of Stanford University

37 Fuchs, V.R., Garber, A.M. “The New Technology Assessment.” The New England Journal of Medicine, 1990; 323(10): pp. 673-7.38 Neumann, P., et al. “Are Pharmaceuticals Cost-Effective? A Review of the Evidence,” Health Affairs, 2000; 19(2): pp. 92-109.

12

Quality-Adjusting PricesWithin many sectors of the economy, the quality of goods and services increases over time. Perhaps the best

example of this phenomenon is in computers, where the capabilities of most products (e.g., speed, ability to handlesoftware and Internet applications) have increased dramatically over time, even as prices have fallen. Another examplecomes from the automobile industry, where there have been dramatic improvements in recent years, including theaddition of air bags and new features that have led to better fuel efficiency. In these and other industries, it is unfairto measure price inflation simply by calculating the increase in the retail or wholesale price of the good or service inquestion. Rather, some sort of adjustment for quality must be made that will tend to make any calculation of inflationlower than through the use of a simple year-over-year price comparison.

While the Bureau of Labor Statistics (the entity that calculates wholesale and retail price inflation in the UnitedStates) does attempt to calculate “quality-adjusted” inflation in some sectors of the economy (e.g., apparel, consumerelectronics), it has largely not done so with pharmaceuticals. The primary reason is that such an exercise would requirethe ability to understand whether new products within a therapeutic class actually improve outcomes (e.g., increasedlongevity, enhanced productivity, better quality of life), and to assign a value to these improvements. Unfortunately, itis difficult to make such calculations with the precision that might be required for a government inflation adjustment.But as Cutler’s work suggests, pharmaceuticals and other health care treatments may be leading to improvements inhealth care outcomes that, even using conservative estimates of the value of added life-years, are extremely valuableto society and to individuals. If these gains could be calculated in a rigorous fashion for the industry as a whole, it islikely that quality adjustments would lead to lower estimates of pharmaceutical price inflation.

and NBER, and Joseph Newhouse of Harvard University,examined the reasons for the 30 percent drop in themortality rate from acute myocardial infarctions (AMIs), orheart attacks, between 1975 and 1995. The authors findthat behavior changes account for relatively little of thedecline. Rather, changes in the medical treatments for themanagement of AMIs are responsible for the majority —55 percent — of the reduction in mortality, withpharmaceuticals alone being responsible for over onequarter of the overall reduction, making them the singlemost important factor in explaining the decline. Use ofaspirin, thrombolytics, and beta-blockers was singled out asthe major contributor to the reduction in mortality. The

same study found that the typical heart attack victim lived5 years and 10 months after a heart attack in 1991, 8 months longer than in 1984. This increase in lifeexpectancy is conservatively valued at $15,000 per person,significantly greater than the $4,000 increase in the costsof heart attack treatment during that time period (anincrease driven by greater intensity of services rather thanthe price of a given service). Cutler goes on to suggest thatthe true “price” of heart attack care has been fallingduring this time period, as the quality improvement fromincreased longevity alone serves as an effective pricereduction to consumers that more than outweighs anyincrease in monetary costs.39

39 Cutler, D., McClellan, M., Newhouse, J. “The Costs and Benefits of Intensive Treatment of Cardiovascular Disease.” Conference Paper,Measuring the Prices of Medical Treatments, American Enterprise Institute/Brookings Institution, December 12, 1997. 13

A second study by Cutler andSrikanth Kadiyala of the NationalBureau of Economic Research(NBER) builds on these results bylooking at changes in survivalrates after AMIs and strokes. Thisstudy credits medical research —which helps to create new drugsand treatment protocols — for atleast a third of the observedimprovement in survival rates,with new therapies to reduceblood pressure and cholesterolbeing worth 13 percent on their own.40 In a separateanalysis, Murphy and Topel estimate that the totaleconomic value to Americans from reductions in mortalityfrom cardiovascular disease between 1970 and 1990 is$1.5 trillion each year.41

Thus, Cutler and Kadiyala’s analysis would suggest that$500 billion or more of this economic value is the result ofmedical research that leads to new drugs and treatments;this figure is 20 times greater than the NIH annual budget.In fact, the fruits of medical research as measured by thegains from reductions in mortality from cardiovasculardisease alone are significantly greater than the cost of allmedical research.42

In a third study of heart disease, Maria Hunink of theUniversity of Groningen in the Netherlands and MiltonWeinstein of the Harvard School of Public Health find thatnearly three-quarters of the 34 percent decline in mortalityfrom coronary heart disease (CHD) that occurred between1980 and 1990 is due to improvement in the managementof patients with diagnosed CHD. (Primary preventionaccounted for only one quarter of the decline.) The authorssingle out lipid-lowering drugs for patients with highcholesterol as being especially effective. In fact,improvements in low-density and high-density lipoprotein,whether through diet or medication, explain a full one-third of the decline in mortality.43

Evaluating the Impact ofAll New Drugs

As with the results of thesingle-drug studies, evaluationsof the role of drugs in cardiaccare — especially specific aspectsof that care such as post-MItreatment — do not prove thatnew drug introductions in theaggregate have had a positiveimpact on health status. AsCutler himself noted in his 1997

study, “the important question is whether our resultsgeneralize to other types of medical care.”

Much of the work in examining this very issue has beenconducted by Frank R. Lichtenberg of Columbia Universityand the NBER. Lichtenberg analyzes data over the 1960-1997 period to calculate both the pharmaceutical R&Dexpenditure per life-year gained over this period and themedical expenditure per life-year gained. He begins withan estimate of the long-run elasticity of longevity withrespect to total health expenditures and the correspondingelasticity with respect to pharmaceutical R&D (as indicatedby the number of new drugs approved). Evaluating theseelasticities at the sample mean (e.g., 20.8 new drugsapproved per year) allows the author to calculate theaddition to life expectancy that would occur if just oneadditional drug were approved each year (orcorrespondingly, the addition to life expectancy from a onedollar increase in medical expenditures). He then estimatesthe total life-years gained per year from a permanent unitincrease in both new drug approvals and an extra dollar ofper capita health expenditure. The next step is to estimatethe cost involved in achieving this life-year gain (a figure of$500 million is used to reflect the cost of obtaining FDAapproval of a new drug). Using this methodology,Lichtenberg estimates that the pharmaceutical R&D outlayper life-year gained at $1,345. The corresponding figurefor the cost of medical care per life-year gained is about$11,000.44

40 Cutler, D., Kadiyala, S. The Economics of Better Health: The Case of Cardiovascular Disease, presented at Lasker Charitable Trust/Funding First,December 1999 Conference on the Economic Value of America’s Investment in Medical Research.41 Murphy, K., Topel, R. The Economic Value of Medical Research, Revised, September 1999. Earlier version presented as the Thompson Lecture tothe Midwest Economic Association and in workshops at the World Bank, MIT, University of Chicago, and Boston University.42 Cutler, D., Kadiyala, S. 1999.43 Hunink, M., et al. ”The Recent Decline in Mortality from Coronary Heart Disease, 1980-1990. The Effect of Secular Trends in Risk Factors andTreatment.” Journal of the American Medical Association, 1997; 277(6): pp. 535-542.44 Lichtenberg, F. Sources of U.S. Longevity Increase: 1960-1997. Working Paper No. 405. December 2000. Center for Economic Studies and IfoInstitute for Economic Research. Munich, Germany.

The total economic value to

Americans from reductions in

mortality from cardiovascular

disease between 1970 and 1990 is

$1.5 trillion each year.

14

The first important findingfrom this study is that the cost ofadding life-years to the U.S.population is much less if it isachieved through theintroduction of new drugs thanif it is done more generallythrough health care outlays. Ittakes only about one dollar ofoutlays for new drugs to achievethe same gain in life-years aseight dollars scattered throughthe health care system as awhole. Thus, it takes “less buck to get the bang” if thestrategy is keyed to new drugs.

Second, Lichtenberg juxtaposes his calculations of thecost of achieving life-year gains with figures pulled fromother research on the benefits of life-years gained. Using afigure of $150,000 as the average value of a life-year,Lichtenberg finds that the benefit-to-cost ratio is 13.6 forgeneral medical expenditures and 111.5 for pharmaceutical

R&D.45 Figure 5 demonstrates thewide range in the calculation ofthe value of a life-year.Conservative estimates, likethose of Cutler et al., and ourupdate of this approach toapproximate what the valuewould be in 2000, do notaccount for non-marketvaluation of life. Estimates suchas those by Murphy/Topelattempt to account for non-market values, and are thus

quite a bit larger. No matter which estimate one chooses touse, however, the cost-effectiveness of pharmaceuticalinnovation is still readily apparent. For example, if thefigure of $38,000 is substituted for the $150,000 used byLichtenberg for the average value of a life-year, thebenefits are still 28 times as large as the cost of“producing” this extra life-year through pharmaceuticalinnovation.

45 Ibid.

Estimating the Value of a Life-YearThe studies cited in this report use alternative approaches for setting the value of a life-year. Some researchers

estimating the economic “output” of an individual use average per capita income (or per capita gross domestic product)as a proxy for the value of an additional year of life. This methodology is generally considered to be relativelyconservative, as it does not assign a value to benefits outside of a person’s earnings, such as the enjoyment of leisure.Recent articles by experts on the economics of medical research and technological innovation are using a measure of fullincome and full consumption that includes the value of non-market time. They believe that “value of life” calculationsthat focus solely on earned income understate the “willingness to pay” for additional life-years. Since many gains inhealth and longevity described in this report are concentrated among older people, for whom earnings are typicallylower and non-market time more important, it is particularly important to use a construct for the value of a life-year thatincludes both market and non-market time.

Emerging research also shows that medical advances, or breakthroughs in the battle against one disease, may increasethe value of advances against other diseases. This “complementarity” can be illustrated by the fact that if more peoplesurvive heart disease in middle age, or as the “young-old,” there will be more people who stand to benefit from abreakthrough against Alzheimer’s as more people make it to the “older-old” years. Professors Kevin Murphy and RobertTopel of the University of Chicago have developed a model for assessing the value of medical research. They find thatchanges in health that increase life expectancy by one discounted life-year generate an increase in the value of life ofabout $150,000-$200,000 per person.

Source: Murphy, K., Topel, R. The Economic Value of Medical Research, forthcoming.

It takes only about one dollar of

outlays for new drugs to achieve

the same gain in life-years as eight

dollars scattered through the health

care system as a whole.

15

Figure 5

Estimating the Value of a Life-Year

$250,000

$200,000

$150,000

$100,000

$50,000

$0

Cutler et al. 2000 GDP Estimate Murphy/Topel

Source: Cutler, D., et al. as cited in Lichtenberg, “Are the Benefits of Newer Drugs Worth Their Cost?Evidence from the 1996 MEPS, “Health Affairs, 2001; 20(5): pp. 241-51. Author’s estimate based on 2000 GDPand 2000 Census data; Murphy/Topel, The Economic Value of Medical Research, Revised September 1999.

$25,000$38,000

$150,000

$200,000

A second study by Lichtenberg looked at the role of newdrugs across disease types. Evaluating all diseases, patients,and outpatient drugs, Lichtenberg found that there was adirect correlation between reductions in mortality within aparticular disease and the number of new drugs used totreat that disease. These results are controlled for effectson mortality of other economic/social trends and non-druginnovations, such as new surgical procedures and vaccines.Over 45 percent of the variation in mortality acrossdiseases between 1970 and 1991 is explained by theextent to which new drugs are used to treat the disease —making new drug introduction by far the most importantfactor in explaining reductions in mortality. In fact, thereduction in premature death was over five times greater(72.7 percent versus 13.0 percent) in diseases with thehighest utilization of new drugs than for diseases with thelowest utilization of new drugs. On average, Lichtenbergestimates that each of the 436 new drugs introducedbetween 1970 and 1991 annually adds 11,200 aggregateyears of life to the U.S. population. Lichtenberg finds thatnew drugs appear to have reduced mortality in all agecategories in at least one of the two decades studied. Healso concludes that the “elasticity of mortality” is aboutone-half (e.g., a 10 percent increase in new drug approvalsis estimated to reduce mortality by 5 percent).46

International Comparisons of the Value of Drugs

The work by Cutler, Lichtenberg, and others is primarilyconfined to the United States. Relatively little work, in fact,has been done to evaluate the role of drugs around theworld. H.E. Frech and Richard D. Miller, Jr., however,conducted one such study for the American EnterpriseInstitute. In an evaluation of spending in 21 Organizationof Economic Cooperation and Development (OECD)countries, Frech and Miller find a significant, positiverelationship between pharmaceutical spending and lifeexpectancy at age 40 and age 60. The finding is especiallystrong at age 60 — they estimate that doublingpharmaceutical consumption would raise remaining lifeexpectancy by 2 percent for the average 40-year old andby 4 percent at age 60. Interestingly, the study found thatnon-pharmaceutical health care spending had no effect onlife expectancy at birth, and a slightly negative butstatistically insignificant impact at ages 40 and 60. In otherwords, pharmaceutical expenditures tend to prolong life atages 40 and 60, but other types of health careexpenditures do not.47

International comparisons such as those made by Frechand Miller demonstrate that advances in pharmaceuticaltreatment and other medical technologies must beevaluated within the larger context of public health and

46 Lichtenberg, F. Pharmaceutical Innovation, Mortality Reduction, and Economic Growth, presented at the Conference on The Economic Value ofMedical Research, December 1999.47 Frech, H., Miller, D. The Productivity of Health Care and Pharmaceuticals: An International Comparison. Washington, D.C.: AEI Press, 1999.

16

economic development. Alongwith health care services, thepolitical, social, economic, andenvironmental climates of anation also influence the overallhealth of the population. In fact,echoing earlier work by AaronWildavsky,48 Alvin Tarlov notesthat economic and public healthfactors such as clean water,sanitary housing, and improveddiet have, in the last century,contributed more to increased lifeexpectancy than have medicaladvances.49 According to Tarlov,other than penicillin and a fewother antibiotics, no singlemedical advance has had asdrastic an effect on life expectancy and overall health ashave these non-medical factors.

That said, as countries become more developed, theincremental gains from improvements in public health(e.g., cleaner water, more sanitary housing) diminishsignificantly, while gains from medical interventionsbecome relatively more important. In the U.S., for example,Penny Mohr and colleagues found that medicalinterventions, including pharmaceutical treatments, nowcontribute more to gains in life expectancy than do thetypes of public health advances that took place during theearly and middle part of the twentieth century. Within theU.S., the greatest life-saving advances in recent years havebeen due to pharmaceuticals. In addition to the already-mentioned effects of antibiotics, vaccinations have all buteradicated killer conditions such as diphtheria, whoopingcough, measles, and polio.50 The importance and cost-effectiveness of thesepharmaceutical interventions hasbeen demonstrated clearly overthe last century.

ComparingPharmaceutical BenefitsAmong U.S. Regions

While internationalcomparisons are obviously hardto make, comparative analysisof pharmaceutical utilizationacross regions within a countrymay yield more reliable orrobust results. This type ofanalysis can help us infer theimpact of drugs over time fromcross-sectional variations withinnational borders.

Both the value and difficultyof cross-sectional analysis are

evident in Pierre-Yves Cremieux, et al.’s attempt to tiepharmaceutical use patterns to infant mortality rates acrossregions of the U.S.51 Using multiple regression analysis, theresearchers found that regions with higher overall spendingon pharmaceuticals had lower infant mortality rates thanthose that spent fewer dollars on pharmaceuticals. Severalother factors, including the number of teen pregnancies,number of physicians per capita, and low-birth-weightprevalence were also found to have a substantial effect oninfant mortality rates. Variables other than pharmaceuticalspending will, of course, have important effects on infantmortality, but Cremieux and colleagues observe that “theincrease in spending [on pharmaceuticals] observed in theUnited States has been accompanied by a measurableeffectiveness that translates into lower infant mortality.”The authors found that regions that spend more onpharmaceuticals also tend to be those regions whosehealth care systems and public health infrastructures aremore effective at promoting health as measured by infant

mortality. In other words,pharmaceutical innovation andthe use of pharmaceuticals intreatment may, in fact, promotemore efficient and better qualityhealth systems. These improvedoverall delivery systems lead tobetter outcomes such asreduced infant mortality.

The reduction in premature death

was over five times greater in

diseases with the highest utilization

of new drugs. On average, each of

the 436 new drugs introduced

between 1970 and 1991 annually

adds 11,200 aggregate years of life

to the U.S. population.

Regions with higher overall

spending on pharmaceuticals had

lower infant mortality rates than

those that spent fewer dollars on

pharmaceuticals.

48 Wildavsky, A. “Wealthier is Healthier.” Regulation, 1980; 4(1): pp. 10-2.49 Tarlov, A. “The Coming Influence of a Social Sciences Perspective on Medical Education.” Academic Medicine, 1992; 67(11): pp.724-30.50 Mohr, P., et al. The Impact of Medical Technology on the Future of Health Care Costs, February 28, 2001. Project Hope, Bethesda, Maryland.51 Cremieux, P., et al. “Pharmaceutical Spending and Health Outcomes in the United States.” Reasearch In Human Capital And Development:Investing in Health: The Social and Economic Benefits of Health Care Innovation, 2001; 14: pp. 59-75. 17

Improving the Quality of LifeVirtually all of the studies mentioned in this section attempt to estimate the economic value gained through the

extension of life. Yet medical advances, including new drugs, can not only increase longevity, but also may improve qualityof life by enhancing mobility, reducing pain, sharpening mental capacity, and the like. Thus, the estimates of the benefitscreated by medical advances included in these studies are likely to significantly understate the true benefits.

Looking AheadPharmaceutical advances are

expected to continue to have amajor impact on life expectancy,primarily by further reducingmortality rates in diseases thattoday claim many lives. In fact,four studies by the BattelleInstitute predict diseasepatterns in 2015 in the U.S., Germany, France, and theUnited Kingdom. They suggest that pharmaceuticaladvances will continue to be a major contributor toreductions in mortality — accounting for 19 to 40 percentof the projected reduction in mortality from coronary heartdisease, 15 to 40 percent of the reduction incerebrovascular disease, 28 to 65 percent in breast cancer,and 3 to 26 percent in lung cancer. New medicaltechnologies, including pharmaceuticals, are also expectedto yield economic benefits. In the U.S., these advances areexpected to save $420 billion over a 10-year period.52

Reductions in Overall HealthCare Costs

As noted previously, a number of studies have suggestedthat use of a single new drug can serve to reduce costs inother parts of the health care system. In many cases, thesestudies have found reductions in use of hospital andemergency services. In some cases, the reductions aresignificantly greater than the incremental cost of using thenew drug, yielding a net cost reduction throughout thesystem. In other cases, the incremental cost of the drug isgreater than any savings generated elsewhere.

Macro-Analyses of the Impact of New Drugson Overall Health Costs

As with evaluations of new drugs on health status,researchers have recently tried to expand the body of

research found in single-drugstudies by conducting macro-analyses of the impact ofpharmaceuticals on overall healthcare costs. Some of these studieslook at the costs of treating aparticular disease. For example, astudy by NBER found that the costof treating major depression in

the U.S. fell by 25 percent from 1991 to 1995 because ofadvances in antidepressant drugs.53

Other studies look at the impact of new drugs on overallhealth care costs across diseases and conditions. A study byLichtenberg evaluated data on the drugs prescribed byphysicians in outpatient visits, by disease, from the 1980and 1991 National Ambulatory Medical Care Survey DrugMentions files produced by the National Center for HealthStatistics. From these data, Lichtenberg found that thenumber of hospital days declined most rapidly for thosediagnoses with the greatest increase in the number ofdrugs prescribed and the greatest use of new drugs. Healso found that increased drug use was associated with alower likelihood of a referral to another physician and areduction in inpatient surgical procedures. In fact, hisestimates suggest that each increase of 100 prescriptions isassociated with 16.3 fewer hospital days. He extrapolatesthese figures to find that each $1 increase inpharmaceutical spending yields a $3.65 reduction inhospital expenditures. Allowing for an expenditure increaseof $1.54 for physicians’ services associated with theadditional pharmaceutical spending still leaves a reductionof $2.11 for the extra $1 in drug spending. Assuming nochanges in other components of health care spending(e.g., long-term care), the net gain for $1 in extra drugspending is $1.11.54 These estimates do not assign anypositive value to the reduction in lost work or leisure timethat accompany the decline in hospitalization. Accountingfor these indirect cost savings would likely substantiallyincrease the estimated value of pharmaceutical use.55

52 Hall, M. The Impact of Behavioural and Biomedical Advance on Health Trends Over the Next 25 Years. London, UK: Office of Health Economics;Office of Health Economics Briefing, No. 31. November 1994.53 National Bureau of Economic Research. Measuring the Prices of Medical Treatments. Washington, D.C. December 1997.54 Lichtenberg, F. “Do (More and Better) Drugs Keep People Out of Hospitals?” AEA Papers and Proceedings. May 1996; 86(2): pp. 384-88.55 Ibid.

The cost of treating major

depression in the U.S. fell by 25

percent from 1991 to 1995 because

of advances in antidepressant drugs.

18

Lichtenberg also documentsthe cost-effectiveness of newdrugs.56 He finds that the use ofnewer, and generally moreexpensive, drugs actuallydecreases the overall costs ofmanaging a variety of conditions.By decreasing mortality,decreasing the need for hospitaland other services, and increasing quality of life throughdays without diminished functioning, newer drugs morethan pay for their extra cost. Using data from the MedicalExpenditures Panel Survey (MEPS), Lichtenberg finds thatusing newer drugs has a statistically significant effect onreducing the number of days lost from work and loweringmortality rates. But the most significant effects he found,the ones that taken alone would justify the increased costof new drug prescriptions, were decreased hospital staysand use of inpatient services.

The difference in the cost of a prescription between an“old” drug and a “new” drug in this study could berepresented by the difference between a 15-year-old drugand a 5.5-year-old drug. Substituting the newer for theolder product would raise the cost of the prescription by$18. Lichtenberg finds the corresponding reduction in costto be $56 per hospital stay. The study found not only thatthose who use newer drugs spend less time in the hospitalthan those using older drugs, but also that their averagestay costs less. The use of newer drugs was also associatedwith reduced outpatient department events, office-basedevents, emergency department use, and dental care.Combining these effects, Lichtenberg finds that for an $18increase in cost due to a newer prescription, total healthcare spending is reduced by a little more than $71, or fourtimes the added prescription drug costs.57

In a more recent study Lichtenberg finds that peoplewho use newer drugs had better post-treatment healththan people using older drugs for the same condition, evenafter controlling for variables such as sex, age, race andincome. These people were more likely to survive, theirperceived health status was higher, and they experiencedfewer limitations on everyday activities. People using newerdrugs tended to experience a greater increase, or smallerdecline, in physical ability than those consuming older

drugs. Lichtenberg also findsthat the effect of drug vintageon health is higher for peoplewith low initial health than it isfor people with better initialhealth status. Therefore, incontrast to other types oftechnical progress, which tendto increase economic inequality,

pharmaceutical progress has a tendency to reduceinequality as well as to promote economic growth, broadlydefined.58

A cautionary note emerges from a recent paper preparedfor the Health Insurance Association of America and BlueCross and Blue Shield Association by Penny Mohr and hercolleagues at Project Hope. Mohr assessed the impact ofnew medical technologies on the cost of health care, andfound that new medical technologies, which can includenew drugs, are sometimes over-utilized and therefore driveup health care costs. While these technologies may reducecosts if their use is restricted to an appropriate population,they can actually drive up overall costs if they are employedin the care of those patients outside the population forwhom they have been shown to be medically appropriateand cost-effective.59

Perhaps the best strategy for preventing overuse andinappropriate use of pharmaceuticals is to tie utilization ofdrugs to best practice research and established clinicalguidelines. This strategy is far more likely to result in therealization of benefits that outweigh the incremental costsof the new drug. Kleinke argues that two factors limit theincentives for managed health care plans to use evidence-based criteria in deciding which drugs to pay for: 1) 22percent of a plan’s population disenrolls every year, makingit difficult for the plan to recoup its investment ininnovative drugs and disease management; and, 2) themajor components of care (and their associated data) aremanaged by different vendors. He notes that “[t]hisisolation galvanizes health plans’ perspective that drugs area cost item to be managed, not a health maintenanceinvestment to be leveraged….[The] current hysteria overpharmacy costs suggests that the typical health plan’sculture remains incapable of taking a ’systems’ view of aline-item cost problem….Expensive drugs are guilty ofdriving up total medical costs until proven innocent.”60

56 Lichtenberg, F. “Are the Benefits of Newer Drugs Worth Their Cost? Evidence From the 1996 MEPS.” Health Affairs, 2001; 20(5): pp. 241-51.57 Ibid.58 Lichtenberg, F. “Pharmaceutical-Embodied Technical Progress, Longevity, and the Quality of Life: Drugs as ‘Equipment for Your Health.’”Forthcoming.59 Mohr, P., et al. The Impact of Medical Technology on the Future of Health Care Costs, February 28, 2001. Project Hope, Bethesda, Maryland.60 Kleinke, J. “Just What the HMO Ordered: The Paradox of Increasing Drug Costs.” Health Affairs, 2000; 19(2): pp. 78-91.

The use of newer, and generally

more expensive, drugs actually

decreases the overall costs of

managing a variety of conditions.

19

In a recent article in HealthAffairs, Kleinke argues thatprogress and increased qualitywill almost certainly drive up thecost of medical care: “…medicalprogress is expensive…. Bycontrast — and in sharp conflictwith many of the presumptionsof managed care — badmedicine is cheap, and badpublic health even cheaper.”61

Pharmaceuticals have beenvilified in the popular media and by insurers as the primaryculprit in rising health care costs. However, withoutbreakthrough pharmaceutical innovations, Kleinke believesthat increased life expectancy, declining rates of infantmortality and disability among the elderly — which arefalling three times as fast as they did over the previouseight decades — as well as improved management ofchronic and often fatal illnesses would all be impossible.Though the cost of new drugs is often high, emergingresearch suggests that their use is very often quite cost-effective.

Kleinke sees the increased spending on drugs thatmanage disease, preclude or delay surgeries, and reducethe use of hospital services as economic, not just medical,progress. It “reflect[s] a profound, permanent movement inour health care system away from medical labor andtoward medical technology — a belated catching-up ofhealth care with the rest of the ‘new economy.’”62 He goeson to argue that “[h]igh-price new drugs may be thecheapest weapon we have in our ongoing struggle againstrising overall medical expenses; unfortunately, we do nothave sufficient data to prove this.”63 While recognizing thatprescription drugs account for a larger percentage ofhealth care expenditures (rising from 5.5 percent to 8.5percent during the 1990s), Kleinke suggests that thisincrease is overshadowed by the administrative waste inour overall health care system.

Noting that insurers haveblamed the recent rise inpremiums on increased drugspending, Kleinke counters thateven a 20 percent increase in acomponent that accounts for only8.5 percent of all spendingcannot account for the double-

digit premium increases thathave occurred in recent years.But even more importantly,current analyses that take theclaims of the insurance industryat face value do not take intoaccount savings in othercomponents that would resultfrom the appropriate use of newdrug therapies. Contrary topopular claims, new drugs andthe increased use of drugs for

chronic conditions, rather than driving insurers to the brinkof financial ruin, would constitute the fulfillment ofmanaged care’s marketing message of increased quality.However, to achieve this goal, payers would have to bewilling to invest money in drugs that may not pay off in theshort term. For an industry that sees better than 20 percentannual enrollment turnover, and that must justify earningsand expenditures quarterly, the long-range perspective,most likely to help patients, is not the same perspective thatwill serve stockholders. “Few in health care purchasingcircles will admit the real truth: Rising drug costs are, ingeneral, part of the solution, not part of the problem,”Kleinke claims.64 But, they can only be part of the solutionto control spending, if reimbursement mechanisms arebased on sound clinical research, and prescriptions aretargeted specifically to those patients who would reaphealth benefits greater than the increased cost of the drug.Otherwise, prescription drug expenditures may begin tooutpace the health and economic benefits they aredesigned to promote.

Increased Economic Growth and Productivity

Even if increased use of new drugs does not generateenough savings elsewhere inthe health care system to justifythe increased cost of the drugs,it is still possible that theincreased expenditures will “payfor themselves” by generatingeconomic benefits outside ofthe health care system.

61 Kleinke, J. “The Price of Progress: Prescription Drugs in the Health Care Market.” Health Affairs, 2001; 20(5): pp. 43-60.62 Ibid, p. 46.63 Ibid, p. 47.64 Ibid, p. 49.

For an $18 increase in cost due to a

newer prescription, total health care

spending is reduced by a little more

than $71, or four times the added

prescription drug costs.

People who use newer drugs had

better post-treatment health than

people using older drugs for the

same condition.

20

Stimulating Economic GrowthA number of researchers make the argument that

increased longevity (which, as demonstrated previously, isin large part due to increased use of pharmaceuticals) playsa very important role in stimulating economic growth, withsome estimates suggesting that it doubles the rate ofgrowth in the economy as traditionally measured.

To understand this argument, one must first examine theimpact of longer life spans on the economy. Lichtenbergargues that increases in life expectancy yield improvementsin the economic well-being of the average person. Tosupport this view, he notes that the typical person born in1995 can expect to live 22 years or 41 percent longer thanthe average person born in 1920.65 Today’s elderly,moreover, are in much better health than they were inprevious generations. This means that they are better ableto continue working, if they wish to do so, yielding moretax revenues; they use less health care, taking somepressure off Medicare and Medicaid; and they spend moreon other goods and services. In short, enhanced longevitycontributes to economic growth.

Yet the most common measure of long-run economicgrowth — growth in annual per capita gross domesticproduct or GDP — does not takeinto account increases in lifeexpectancy. William Nordhaus, forone, argues that there issubstantial underestimation ofeconomic growth due to thefailure to account for increased longevity. He estimates thatthe growth due to longevity, over the course of the lastcentury, is about as large as the measured growth in non-health goods and services. Once adjusted, the rate ofgrowth, Nordhaus claims, is twice as large as traditionalmeasures.66 Murphy and Topel believe that longevity plays avery important role in stimulating economic growth. Theyestimate the value of extending life from the perspective ofthe “present value” of the extra years of life. Using thiscalculation, they find that the value of extensions in lifeexpectancy has been roughly $57 trillion over a 20-yearperiod, a figure that roughly equals the gains inconsumption as measured by growth in national income.67

Using yet a third methodology, Nordhaus finds that forevery time period since 1900, gains from increasedlongevity have been close to (if not above) the gainsgenerated from growth in national income.68

In short, the economic value of increases in lifeexpectancy are an important and often forgotten source ofgains in living standards; economic growth adjusted forlongevity may even be double that of more commonmeasures of economic growth that do not take longevityinto account. And as noted previously, several studies havecome to the conclusion that pharmaceutical innovationsare responsible for a significant portion of the increase inlongevity that has been experienced over the last 20 years.

Enhancing ProductivityAlong with boosting economic growth through increased

longevity, pharmaceutical innovation also may have a directimpact on the economy through reduced absenteeism andenhanced productivity. Specifically, some researchers havetested the impact that new drugs have on missed workdays and missed school days. Reducing this “down” timeshould have a positive impact on the productivity ofworkers and schoolchildren, which should in turn produceshort- and long-term benefits for the economy.

As noted earlier, studies ofspecific drugs, including thosefor treating depression andmigraine headaches, have foundmeaningful productivity benefits.

But relatively few studies have taken an aggregate view ofthe impact of new drugs on the ability to work and timeaway from work.

As noted above, Lichtenberg has begun to study theeffect of drug vintage — defined as the year in which theFDA first approved a drug’s active ingredient — on health.He has tested the hypothesis that a person’s health is anincreasing function of the average vintage of the drugs heor she consumes, other things being equal. His initial worksuggests that use of newer drugs reduces work-loss days.69

Additional research in this area is expected to reinforce thisfinding.

65 Lichtenberg, F. Pharmaceutical Innovation, Mortality Reduction, and Economic Growth. Presented at the Conference on the Economic Value ofMedical Research, Washington, D.C. December 1999.66 Nordhaus, W. The Wealth of Nations: Irving Fisher and the Contribution of Improved Longevity to Living Standards. Paper presented at FisherConference, Yale University, May 1998.67 Murphy, K., Topel, R. The Economic Value of Medical Research, Revised, September 1999. Earlier version presented as the Thompson Lecture tothe Midwest Economic Association and in workshops at the World Bank, MIT, University of Chicago, and Boston University.68 Nordhaus, W. 1998.69 Lichtenberg, F. 2001.

Enhanced longevity contributes to

economic growth.

21

Looking at these study findings as a whole,pharmaceutical innovation and the increased use of newdrugs provide significant benefits to society, benefits thatfar outweigh the incremental costs of the drugsthemselves. In fact, the evidencewould suggest that these costsare more than offset by decliningcosts elsewhere in the health caresystem, making use of new drugsjustified from the narrowperspective of cost savings withinthe health care system alone.

But new drugs provide even more important benefitsthan cost savings elsewhere in the system. Use of newdrugs appears to be responsible for significant gains in lifeexpectancy, which in turn translate into quality-of-lifebenefits for individual patients and increased economicgrowth for the nation as a whole. Cutler’s work suggeststhat factoring quality benefits into the price of health carewould likely mean that the truequality-adjusted price of medicalcare is declining over time. Andeven conservative estimatessuggest that enhanced lifeexpectancy substantially increasesthe rate of economic growth inthe nation, with some estimatessuggesting that it doubles the rate as traditionallymeasured. As various studies make clear, the economic

value of this enhanced growth far surpasses theincremental costs of the new drugs that are primarilyresponsible for creating the increased longevity andassociated economic growth in the first place.

U.S. policy analysts havetended to focus almostexclusively on the share of GDPgoing to health care withoutfactoring in how health careinvestments may be driving upGDP itself. If health care dollarsare invested wisely in preventive

health and in new ways to manage chronic illness anddisability, this can “grow the pie.” If such health careinvestments take a slightly larger share of a substantiallybigger pie, that could turn out to be a good outcome, nota bad one. Of course, where money is wasted oninappropriate or unnecessary care, redundant capacity, orfraud and abuse, added health care outlays do not pay for

themselves through addedgrowth and more productivity.The challenge is to target ourinvestments toward both basicmedical research and appropriatetechnological applications so thatwe can get the best “bang forthe buck.”

Pharmaceutical innovation and the

increased use of new drugs provide

significant benefits to society.

Use of new drugs appears to be

responsible for significant gains in

life expectancy.

The challenge is to target our investments

toward both basic medical research and

appropriate technological applications so that we

can get the best “bang for the buck.”

22

Putting These Findings Together

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