Are New and Innovative Drugs Expensive: The Economic Impact of New Drug Therapies

Red Stethoscope with a Pile of Hundred Dollar Bills.

Policymakers often raise the question ?Do ?new? and innovative drugs costs too much??. Although innovative ?new? drugs may be more expensive than alternative, existing, drug therapies, they are extensively reviewed for their benefits and costs and are considered to be among the most cost effective treatments available. Furthermore, ?new? drugs are also expected to reduce mortality in diseases that claim many lives today, such as cancer.

So, are ?new? and innovative drugs too expensive? Outlays for drug spending are generally based on calculating the estimated benefits they produce. But how can these estimated benefits best be calculated? If drug costs are considered to be a social investment, policymakers may want to determine the return that such an investment yields (in economic terms: ROI or Return on Investment) and whether this return justifies the outlay. One possible way of evaluating the costs is to find out how ?new? or innovative drugs have benefited or improved patients? health and how this contributes to savings within the healthcare system. But cost calculation should also consider the benefits outsides the healthcare system. Often referred as indirect costs cost reductions outside the healthcare system may be considerable. For example, ?new? and innovative drugs may help patients to be more active and productive. They may reduce the effects of cancer related pain and suffering ? and as a result – reduce so called intangible costs. This could lead to reduced absenteeism from work, increased economic productivity and subsequently to higher profits for employers and higher wages for employees. Finally, ?new? and innovative drugs may help people to live longer. The added years of life naturally generate more costs for society but also yield major benefits.

In an attempt to predict disease patterns, the Battelle Memorial Institute (Columbus, Ohio, USA) closely investigated healthcare systems, spending patterns and demographics in the United States, United Kingdom, Germany and France. Each of the 4 separate studies indicate that the availability of ?new? and innovative drugs continued to drive mortality rates down ? accounting for 28% to 65% in breast cancer and 3% to 6% in lung cancer by 2015. The Battelle reports further indicated that the costs of innovative ?new? and innovative drugs outweigh their costs. Based on this data, policymakers evaluating the rising costs of healthcare may conclude that extra drug spending ? especially spending used for new and innovative drugs, may be legitimate.

Reduced need for Hospitalisation
But what effect does extra drug spending have on hospitalisation and inpatient costs? A study by Professor Frank Lichtenberg, Courtney C. Brown Professor of Business at the Columbia School of Business in New York, (NY, USA), evaluating drugs prescribed in outpatient visits by disease for 1980 and 1991 based on data in the National Ambulatory Care Survey provided by the US National Centre for Health Statistics, seems to suggest that hospital stays declined faster in diseases where ?new?, innovative drugs were prescribed. Lichtenberg?s findings indicated that an increase of 100 prescriptions resulted in 16.3 fewer hospital days. Extrapolating these figures, he concluded that an increase of US $ 1.00 in drug spending yields US $ 3.65 reduction of hospital expenditure. Even if the costs associated with additional work for a physician are included (Lichtenberg estimates this at US $ 1.54 per prescription) each additional US $ 1 in ?new? drug spending still yields a reduction of US $ 2.11 in hospital costs.

Lichtenberg?s conclusions are supported by a study by Kenneth Manton and XiLiang Gu, published in 2001, evaluating the effects of ?new?, innovative drugs and the decline in disability and institutionalisation of the elderly. The two researchers concluded that the introduction of new drugs as a result of biomedical research (for example in cancer related osteoporosis) are consistent with an accelerated decline in disability rates. They noticed that the proportion of those 65 years of age and older that were in a nursing home or other institution, fell from 6.8% in 1982 to 6.1% in 1989 and to 4.2% in 1999. This reduction in nursing home stays translated into incredible savings of US $ 18.9 billion. Manton and Gu therefore concluded that ?new? and innovative prescription drugs are an important element in an appropriate disease management strategy avoiding or shortening the institutionalising of the elderly.

Lichtenberg?s estimates, however, do not assign any value to indirect and intangible costs associated with the reduction of lost work and the economic impact on society or leisure time that are the result of a decline in hospitalisation. Psychosocial factors are also left out. If all these effects would be included, they would most likely substantially increase the value of ?new? and innovative drug therapy.

In the United States alone, the total cost savings as a result of ?new?, innovative drug spending are expected to exceed US$ 420 billion over a 10 year period. Unfortunately, this does not necessarily mean that ?new? and innovative drug spending reduces the cost of healthcare in general. Cost-effectiveness should not be misunderstood to imply costs savings. Some drugs actually reduce overall healthcare costs, while other raise overall costs but simultaneously producing other indirect and intangible benefits.

The ascribed value of ?new? and innovative drugs is often determined by comparing the drug to other potential interventions. If the alternative produces fewer benefits for the same costs or the same benefits for higher costs, the new drug can be considered cost-effective.

Based on the available data, ?new? and innovative drugs are an important element in disease management strategies. If policymakers want to establish the cost-effectiveness and estimated benefits it is important to understand how ?new? and innovative drugs contribute to disease management in for example cancer care. Existing economic evaluations have shown that it is fair to assume that advances in drug discovery, development and production yield direct economic benefits and that ?new? drugs may not costs to much.

This is part of an article originally published in Oncology Europe in 2004.