Article

Many economists believe that new goods are at the heart of economic progress and that, compared to older ones, they provide more “product services” in relation to the cost of their production. The pharmaceutical industry is among those industries most likely to generate new goods; it is one of the most R&D intensive. Moreover, in part because of extensive FDA regulation, unusually good data about the launch and use of new pharmaceutical goods are available.

Using these data, I have done several econometric studies at the individual, disease and country level in order to assess the impact of the development and use of new drugs on public health and the economy. Most of my studies are based on data covering all medical conditions (diseases) and all drugs. They therefore provide evidence about the effects of new drugs in general, not about specific drugs or their effects on particular diseases.

I hypothesize that people may obtain several kinds of benefits from using newer, as opposed to older, pharmaceutical products. These benefits include longer life, reduced limitations on activities (including work) and reduced spending on hospitals and long-term care. In this article, I describe two of the studies I have conducted to estimate the magnitude and value of these benefits and compare them to the cost of using newer drugs.

Longevity

In a study entitled “The Impact of New Drug Launches on Longevity: Evidence from Longitudinal, Disease-Level Data from 52 Countries, 1982–2001” (International Journal of Health Care Finance and Economics, March 2005), I provide evidence that in the last two decades new drug launches have added greatly to longevity in these nations, both developed and developing.

Over the past 50 years, average life expectancy around the world has increased sizably, from 46.5 years for a child born in 1950–55 to 65 years for a child born in 1995–2000. Also, the gap in average life expectancy between rich and poor countries has been halved, from 25 to 12 years. Sorting out the causes for improvements in longevity, however, has proved difficult. Many health researchers have primarily credited more education, higher income, a healthier lifestyle and a safer environment for increased longevity.

Focusing in this study on the remarkable two-year increase in longevity between 1986 and 2000, I calculate that about 40 percent of the increase can be traced to the introduction of new drugs, which account for a substantial fraction of medical innovations. On average, the introduction of new drugs lengthened the life of people in these 52 countries by just short of three weeks each year.

By combining data from the IMS Health Drug Launches database and the World Health Organization Mortality database, I was able to link the number of new drugs launched since 1982 with changes in the probability of surviving to certain ages, such as 55 and 65 years, for each major disease category, country and year. An increase in the cumulative number of new chemical entities—drugs whose key ingredient has not previously been available in the country to treat disease—boosts the survival rate to age 65.

Three to six years after a drug is introduced, the effect on longevity is more than twice as large as in the first three years, which suggests that it takes several years for a new drug to reach more consumers and have its full impact on survival rates.

Using these results, I calculate an upper limit to the cost per life-year gained from the launch of new drugs to be $4,500, a sum far lower than most estimates of the value of a life-year—at least $50,000 in the case of Americans. So my study suggests that spending on new drugs may be a cost-effective way to increase longevity.

Ability to Work

Another study, “Availability of New Drugs and Americans’ Ability to Work” (Journal of Occupational and Environmental Medicine, April 2005), examines the impact of the introduction of new drugs during a 15-year period on the ability of nonelderly adult Americans to work.

Several previous case studies have examined the impact of specific new drugs on the ability to work. For example, one study found that terbutaline, an asthma drug approved by the FDA in 1974, reduced the number of work or school days missed due to asthma by 57 percent. These case studies were based on relatively small samples of individuals with the same condition at the same time, and it is difficult to estimate from them the average or aggregate effect of new drugs on the ability to work.

I used a different approach, basing my analysis on data on about 200,000 Americans, observed between 1982 and 1996, with 47 major chronic conditions. I investigated whether people with conditions for which many new drugs were introduced exhibited a greater increase in ability to work than did people with conditions for which few new drugs were introduced, controlling for other factors.

Using multiple regression analysis, I assessed the effect of the cumulative number of drugs approved for a condition on the ability to work. The estimates implied that during 1982–96 the introduction of new drugs reduced the probability of being unable to work because of the 47 chronic conditions by 1.8 percent a year. If the probability of being unable to work had not been reduced by new drug introductions during 1982–96, this probability would have been 30 percent higher in 1996 than it actually was—5.2 percent instead of 4.0 percent.

In 1996, the average employer spent about $131 a day, or $34,000 a year, on employee compensation (including fringe benefits). Hence, the per capita annual value of the estimated reduction in the probability of being unable to work at all was about $395 (= [5.2% - 4.0%] • $34,000). I estimate that the average expenditure on new drugs for the 47 sample chronic conditions per working-age person was $51. The estimated benefit of the new drugs, in terms of the value of the increase in workforce participation, is much greater than the estimated cost of the new drugs.

My findings suggest that policies that broadly reduce the development and use of new drugs—such as weak intellectual property protection and large-scale importation from countries with strict drug price controls—may ultimately reduce the rate at which longevity increases and the ability of Americans to work.

Frank R. Lichtenberg, the Courtney C. Brown Professor of Business in the Finance and Economics Division, is an expert on how the introduction of new technology arising from research and development affects the productivity of companies, industries and nations. A research associate of the National Bureau of Economic Research, he has served as a consultant to a variety of private and public organizations and testified before Congress.

To read more about her research or new drug development and use, visit Columbia Ideas at Work, www.gsb.columbia.edu/ideasatwork/researcharchive.