The Value of Innovation


In 2001, the National Pharmaceutical Council provided funding for the September/October issue of Health Affairs, which focused on the value of innovation. The issue showcased a growing body of research that examines the value of pharmaceuticals and other medical innovations.

Descriptions of some of the key articles from this issue follow:

Are the Benefits of Newer Drugs Worth Their Cost? Evidence From the 1996 MEPS

Author: Lichtenberg, FR.

This study analyzes data on prescribed medicines from the 1996 Medical Expenditure Panel Survey (MEPS), a nationally representative database on the use of health care services and spending, to examine the association between the use of newer medicines and morbidity, mortality, and health spending. According to the findings, people consuming newer drugs were significantly less likely to die by the end of the survey and were significantly less likely to experience work-loss days than were people consuming older drugs. The most notable finding, however, is that use of newer drugs tends to lower all types of nondrug medical spending, resulting in a substantial net reduction in the total cost of treating a given condition.

Is Technological Change in Medicine Worth It?

Authors: Cutler, DM; McClellan, M.

This article explores the relationship between spending and health benefits. They analyze technical change in five medical conditions to determine whether or not the benefits of medical advances exceed the costs in those diseases. In four of five conditions examined -- heart attacks, low-birthweight infants, depression, and cataracts -- benefits outweighed costs, and in the fifth condition, breast cancer, costs and benefits were equal. Putting a price on life is a difficult task, but the authors calculate that the true cost of some types of care is actually falling because of medical innovation.

Link Between Gross Profitability and Pharmaceutical R&D Spending

Authors: Scherer, FM.

This analysis focuses on the question: What does the pharmaceutical industry really do with its profits? The answer is that the new pharmaceutical discoveries benefiting consumers are being driven by the gross profit margins that pharmaceutical companies make. As profits increase, so does research and development. This ultimately yields new and promising options for consumers. In addition, the author finds that medical innovations are leading to longer life and improved quality of life.

Perspectives on the Pharmaceutical Industry

Authors: Reinhardt, UE.

This paper provides an economic perspective on the pharmaceutical industry, which has come under increasing criticism on a number of issues. Much of the criticism is based on inaccurate perceptions, and suggests that our nation can indeed afford spending on drugs that help us live longer, more productive lives. Spending on pharmaceuticals accounts for only a small fraction of our Gross Domestic Product (GDP). In fact, Americans spend more per capita on alcohol, tobacco, and entertainment combined than on pharmaceuticals.

Price of Progress: Prescription Drugs in the Health Care Market

Kleinke, JD.
Increased spending on pharmaceuticals does not explain the insurance premium increases that many consumers are seeing. The author points out that pharmaceuticals are a small fraction of the total equation, and that even though spending on pharmaceuticals is increasing, that rise in expenditures amounts to a small percentage of the premium increases.