Abstract
A number of authors have argued that technological innovation has increased U.S. health care spending. We investigate the impact that pharmaceutical innovation had on the average cost of U.S. health care episodes during the period 2000–2014, using data from the Bureau of Economic Analysis’ Health Care Satellite Account and other sources. We analyze the relationship across approximately 200 diseases between the growth in the number of drugs that have been approved to treat the disease and the subsequent growth in the mean amount spent per episode of care, controlling for the growth in the number of episodes and other factors. Our estimates indicate that mean episode cost is not significantly related to the number of drugs ever approved 0–4 years before, but it is significantly inversely related to the number of drugs ever approved 5–20 years before. This delay is consistent with the fact (which we document) that utilization of a drug is relatively low during the first few years after it was approved, and that some drugs may have to be consumed for several years to have their maximum impact on treatment cost. Our estimates of the effect of pharmaceutical innovation on the average cost of health care episodes are quite insensitive to the weights used and to whether we control for 3 covariates. Our most conservative estimates imply that the drugs approved during 1986–1999 reduced mean episode cost by 4.7%, and that the drugs approved during 1996–2009 reduced mean episode cost by 2.1%. If drug approvals did not affect the number of episodes, the drugs approved during 1986–1999 would have reduced 2014 medical expenditure by about $93 billion. However, drug approvals may have affected the number, as well as the average cost, of episodes. We also estimate models of hospital utilization. The number of hospital days is significantly inversely related to the number of drugs ever approved 10–19 years before, controlling for the number of disease episodes. Our estimates imply that the drugs approved during 1984–1997 reduced the number of hospital days by 10.5%. The hospital cost reduction was larger than expenditure on the drugs.
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Notes
Dunn et al (2018) say that “there is evidence that many new technologies are cost-effective, but they are often more expensive than older treatments. That is, despite their cost-effectiveness, they are not cost-saving, which leads to rising health care expenditures.”.
The number of hospital discharges and days of care in 2015 were not significantly related to the number of drugs launched after 2005. As discussed below, utilization of drugs during the first few years after they are launched is relatively low, and drugs for chronic conditions may have to be consumed for several years to achieve full effectiveness.
Several studies have examined the effect of changes in prescription drug use (e.g., due to changes in insurance coverage), as opposed to prescription drug innovation, on medical expenditure. The Congressional Budget Office (2012) estimated that a 1 percent increase in the number of prescriptions filled by beneficiaries would cause Medicare’s spending on medical services to fall by roughly one-fifth of 1 percent.” Roebuck et al (2015) found that “a 1% increase in overall prescription drug use was associated with decreases in total nondrug Medicaid costs by 0.108% for blind or disabled adults, 0.167% for other adults, and 0.041% for children. Reductions in combined inpatient and outpatient spending from increased drug utilization in Medicaid were similar to an estimate for Medicare by the Congressional Budget Office.” Zhang et al (2009) found that “enrollment in Medicare Part D was associated with increased spending on prescription drugs. Groups that had no or minimal drug coverage before the implementation of Part D had reductions in other medical spending that approximately offset the increased spending on drugs, but medical spending increased in the group that had more generous previous coverage.”.
We will also briefly examine the relationship between the growth in the number of drugs used to treat the disease ever approved and the growth in the number of cases of the disease, although this relationship is likely to be subject to reverse causality.
As discussed below, there is likely to be a substantial lag between the approval of a new drug and its maximum impact on health care spending.
Many drugs have multiple indications: 66% of drugs have 2 or more Clinical Classification Software (CCS) indications; 25% of drugs have 5 or more CCS indications.
psn is the mean gross price of the drug, not the price net of rebates. Data on rebates are not available.
The mean net (of rebates) price probably fell by less than 74%. In the U.S. in 2014, rebates reduced total brand name drug cost in Medicare Part D plans by 17.5% (Centers for Medicare and Medicaid Services 2021). Alston et al. (2018) argued that rebates are rarely used for generics, so for generic products, net prices are likely to be very close to the gross prices. According to those authors, “rebates are mostly used for high-cost brand-name prescription drugs in competitive therapeutic classes where there are interchangeable products (rarely for generics), and aim to incentivize PBMs and health insurers to include the pharmaceutical manufacturer’s products on their formularies and to obtain preferred ‘tier’ placement.”.
The e-Drug3D database is based on the FDA’s Drugs@FDA database (Food and Drug Administration 2023a), but the latter does not include WHO ATC codes.
The surge in new drug approvals during the 1990s was partly due to passage by Congress in 1992 of the Prescription Drug User Fee Act, which allowed the FDA to collect fees from drug manufacturers to fund the new drug approval process. The average annual number of new drugs approved by the FDA during 1996–1999 was 67% higher than it was during 1985–1995 (Food and Drug Administration 2023b).
Community hospitals are defined as all nonfederal, short-term general, and other special hospitals. Other special hospitals include obstetrics and gynecology; eye, ear, nose, and throat; long term acute-care; rehabilitation; orthopedic; and other individually described specialty services. Community hospitals include academic medical centers or other teaching hospitals if they are nonfederal short-term hospitals. Excluded are hospitals not accessible by the general public, such as prison hospitals or college infirmaries.
When the 3 covariates are excluded from Eq. (3), all of the estimates of βk are negative but statistically insignificant.
Aggregate hospital charges were $1471 billion in 2014.
The National Health Expenditure Data includes a broader range of hospital services: physician and clinical services, prescription drugs, etc. It also includes a broader range of hospitals such as military, Veterans, Indian Health Services, etc.
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I am grateful to Dominique Douguet of the Institut de Pharmacologie Moleculaire et Cellulaire for providing me with data from the e-Drug3D database, and to Stéphane Klegou of Centre National Hospitalier d'Information sur le Médicament for providing me with data from the Thériaque database.
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Lichtenberg, F.R. Has pharmaceutical innovation reduced the average cost of U.S. health care episodes?. Int J Health Econ Manag. 24, 1–31 (2024). https://doi.org/10.1007/s10754-023-09363-y
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DOI: https://doi.org/10.1007/s10754-023-09363-y