Do New Drugs Raise or Lower Health Care Costs?

29 Apr

New prescription drugs seem to be coming to market all the time as evidenced by all those direct-to-consumer advertisements you see on TV telling you to ask your doctor about your inability to get an erection or the pain that prevents you from playing with your grandkids or the depression that follows you around in the form of a raincloud with a frowny face. And, as you know if you’ve ever filled a prescription for these new drugs, they’re expensive. That leads to an obvious question: If there are all these new drugs, and they are so expensive, won’t that lead to an increase in health care expenditures?

The answer isn’t so clear cut. If all that happened was that we spent more on drugs, but our other use of the health care system didn’t change, then yes, these new expensive drugs would raise costs. On the other hand, if by using these drugs, our health improves to the point that the expense on drugs is more than offset by the savings from not needing to consume other types of health care, then we would expect a reduction in costs.

This is precisely what Turkish economists Abdulkadir Civan and Bulent Koksal studied at the state level in an article in the April 2010 edition of Health Economics. As usual, I’m not going to talk about methods, because frankly, most of my readers don’t know what words like “endogeneity” and “heteroskedasticity” mean. Nor should you. You’re not econometricians. But what I will share are their findings. (You can read a working paper version of their manuscript here.)

Basically, Civan and Koksal found that the newer the drugs being prescribed were, but the lower per capita health care spending was in the state. As they put it “This implies that newer drugs not only increase the quality of medical care, but also actually lower the total health expenditures.” Other models the authors ran confirmed that the states with newer drugs spent more on prescription drugs but less on other types of health care. In other words, the newer drugs are more effective, make people healthier, and as a result they seek other types of health care less often than they otherwise might. One word of warning, however, is that these results are observed in the aggregate, and an individual’s result might well vary. In other words, don’t switch to a newer medication just in hopes of spending less on your own health care.

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Posted by on April 29, 2010 in Uncategorized


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