NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Benefits of Newer Prescription Drugs Exceed their Costs

"Replacing 1,000 old prescriptions with 1,000 new prescriptions will increase drug costs by $18,000 but will reduce the number of hospital stays by nearly six. Since the average cost of a hospital stay is $7,588, a total reduction of $44,469 in hospital costs could be expected."

Americans' spending on prescription medication has grown significantly since the mid-1980s. Although the use of prescriptions is increasing, another important factor in the rapidly rising outlay for drugs is that newer, more expensive drugs are replacing older drugs. A recent health care study estimated the average 1998 price for drugs introduced in 1992 or later was $71.49 per prescription, compared to $30.47 for previously existing drugs. And, although price increases are generally not viewed favorably, a new paper by NBER Research Associate Frank Lichtenberg suggests some definite benefits from the more costly newer drugs. In The Benefits and Costs of Newer Drugs: Evidence from the 1996 Medical Expenditure Panel Survey (NBER Working Paper No. 8147), the author investigates how much of the difference between new and old drugs reflects changes in quality.

Lichtenberg uses data from the 1996 Medical Expenditure Panel Survey (MEPS), a national health care investigation, to provide evidence of drug age (measured as the number of years since the FDA approved the drug) on health conditions and total medical expense. The data include comprehensive health care use and cost information from 22,061 people and 171,587 prescription observations. More than half of the drugs taken in the 1996 study were approved before 1980, and over one-fourth were approved before 1950. Lichtenberg controls for numerous characteristics -- length of illness, education level of the patient, and insurance status for example -- which might correlate with the age of the prescription drug and thus bias the results.

Confirming past research, Lichtenberg finds that replacing an old prescription with a new one would increase the cost of the prescription. According to his results, as an illustration, replacing a 15-year-old drug with a 5.5-year-old drug would increase the prescription cost by about $18. But his analysis finds that replacing older drugs with newer counterparts would have several important benefits: reductions in mortality, morbidity, and total non-drug medical costs. People taking new drugs were significantly less likely to die by the end of the survey than those taking the older medications. They were also significantly less likely to miss days at work than people taking old drugs.

Perhaps the most striking finding is that reducing the age of drugs cuts all types of non-drug medical expenses: hospital stays, office visits, outpatient visits, dental visits, and emergency room visits. The biggest reduction is in hospital expenditures, which account for nearly 42 percent of total medical expense. Replacing 1,000 old prescriptions with 1,000 new prescriptions will increase drug costs by $18,000 but will reduce the number of hospital stays by nearly six. Since the average cost of a hospital stay is $7,588, a total reduction of $44,469 in hospital costs could be expected. Even larger hospital cost savings result because use of new drugs reduces average length of stay as well as the number of stays. The total reduction in non-drug medical expenses is about four times the increase in the costs of the drugs--so reducing the age of drugs substantially reduces the total cost of treatment.

As a final caution, the author offers advice countering a prevailing sentiment that individuals should use less expensive generic drugs to reduce health costs. Lichtenberg warns that "denying people access to branded drugs would increase total treatment costs, not reduce them, and would lead to worse outcomes." He reasons that the average age of generic drugs is much older, at 38 years, versus 23 years for brand name drugs. The motto, "cheapest is always best,"does not apply, as a rule, to prescription drugs.

-- Marie Bussing-Burks


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