Benefits of New Pharmaceuticals Significantly Exceed their Costs

When the average number of years since introduction for prescription drugs falls by five years, the authors estimate, the mean age at death rises by eleven months.

In Pharmaceutical Innovation and the Longevity of Australians: A First Look (NBER Working Paper No. 14009), co-authors Frank Lichtenberg and Gautier Duflos find that the benefits of new pharmaceuticals significantly exceed their costs. Using 1995-2003 data on actual prescriptions from the set of about 700 drugs available under the Australian Pharmaceutical Benefits Scheme (PBS), they estimate that newer drugs increase life expectancy by 1.23 years and drug expenditures by about $12, 976.

Their results further suggest that when the population began using "newer" drugs, longevity increased. When the average number of years since introduction for prescription drugs falls by five years, the authors estimate, the mean age at death rises by eleven months. Using newer drugs also reduces the number of years of potential life lost before the ages of 65 and 70. Overall, using newer drugs to treat diseases apparently accounted for about 65 percent of the two years of increased life expectancy enjoyed by Australians during the period studied.

A patient's health and longevity depend on the treatment he actually receives. Given that a variety of drugs are often available to treat a given disease, a major problem in drug efficacy research is figuring out which drugs are actually used from the class of drugs available. Thanks to Australian data on causes of death and drugs prescribed, Lichtenberg and Duflos can combine data on the deaths from a given disease in a given year with statistical controls for the drugs prescribed for treatment of a particular condition in a given year. They also can construct a measure of how long the pool of drugs actually prescribed to treat a certain disease has been on the market.

The average PBS prescription was for a 17-year-old drug. The measure of the age of the time since approval for the drugs prescribed to treat diseases varied considerably across therapeutic classes. For example, the cardiovascular drugs prescribed in 2003 tended to be a decade newer than the anti-neoplastic and immune-modulating agents prescribed in the same year.

Because data on the listing dates for drugs approved by the PBS are incomplete, the authors used the FDA approval date to determine time since introduction. They believe that the FDA introduction data provides a better measure of the year of global market introduction or first use. A sample of 311 drugs for which both FDA and PBS approval dates were available suggests that the PBS approved drugs roughly 3.6 years later than the FDA.

The authors caution that their estimates may overestimate the cost per year of life gained: they do not take into account the fact that studies using U.S. data suggest that the use of newer drugs decreases hospital and nursing home admissions and increases work effort. Innovation in medical procedures and devices may either substitute or compliment drug innovation, an effect that could lead to overestimation or underestimation of the effects of newer drugs. However, the authors also note that the use of newer drugs appears to improve health more for those in initially poorer health. In their view, this "suggests that pharmaceutical-embodied technical progress has a tendency to reduce inequity as well as promote economic growth, broadly defined."

-- Linda Gorman

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