Evaluating New Drugs: Remember the Bigger Picture

Americans Spend More on Alcohol and Tobacco than on Prescription Drugs

"Don't be penny-wise and pound-foolish" is an old adage that cautions us about false savings.  Sometimes spending a little more now makes the best sense if it maximizes our savings in the long run.  Failure to understand this lesson is at the root of many misjudgments and bad policies regarding the cost of prescription drugs these days.

Critics of high-priced pharmaceutical products cite heavily promoted, expensive new drugs as "the 800-pound gorilla" in our nation's costly health-care system.  Lawmakers are debating ways to address the issue-including price controls and mandating more use of generics. 

Are we getting good value for our drug dollars?   A new body of research offers a compelling contradiction to the notion that we need a "cure" for high-priced drugs.  It turns out that these "expensive" new drugs might just be the best weapon we have against rising health-care costs.

Columbia University economist Frank Lichtenberg has looked at newer drugs versus older drugs and found that people who are using newer ones may indeed be paying more for their medicines.  But in a recent article for the journal Health Affairs, Lichtenberg also points out these same people have lower overall health costs, due in part to reduced hospitalizations.  In addition, they live longer and have fewer lost workdays. 

In other words, we're spending more time at the pharmacy, but less time in the hospital or on the surgical table.  This means we are managing our conditions better and spending less on more expensive types of care.  That's good news for consumers and patients, as well as for employers and for our health-care system as a whole.

A study by Lichtenberg for the National Bureau of Economic Research last fall demonstrated that replacing 1,000 old drug prescriptions with 1,000 newer and more expensive drug prescriptions would increase drug costs by $18,000 but would also cut hospitalization costs by $44,469.

Innovations in drug treatment are helping us deal with many conditions-often with far better results-that required far more expensive medical procedures.  For example, stomach cancer used to be an ailment that was treated primarily by invasive surgery and long hospital stays.  But today, drugs are more commonly utilized.  The newest drugs, though they seem "expensive" up front, are making the use of far more expensive surgery less and less necessary. 

This is the "big picture" that often gets lost in the rush to save a few bucks.  As Lichtenberg writes, "Drug costs (and changes in drug costs) are visible to the naked eye; identification of drug benefits requires careful analysis of good data."  Sound policy requires that we take into account "the full range of effects, not just the costs, of newer drugs."

For this reason, the case for generics (older drugs for which the patents have expired) is vastly overstated.  And the advertising that pharmaceutical companies sponsor for new drugs, contrary to the claims of those who champion generics, serves a useful economic purpose: It informs patients and encourages them to ask about the newest innovations. 

Nevertheless, Michigan has begun to implement a sweeping prescription drug cost-control program.  A state-appointed panel authorizes only certain discounted medications for the 1.6 million Michigan citizens who rely on state programs like Medicaid.  To the extent that this program shifts people to older drugs, the state may end up spending more for health care while patients suffer through longer recoveries.

Profits aren't the problem, either.  Throughout the pharmaceutical industry, they've been steady over time and comparable to the profits in other industrial sectors.  Moreover, a study by Harvard professor and economist F.M. Scherer proved there is a close correlation between pharmaceutical profits and research and development.  The more companies make, the more they pour into finding the next cure or treatment for what ails us.  Profits fuel innovation, while regulations add millions to the cost and long lag times before a drug can be marketed. 

American pharmaceutical companies have produced a constant stream of new, improved drugs for your doctor's toolbox when you get sick.  Common sense dictates that we consider all costs and all benefits, long- and short-term, lest we become "penny-wise and pound-foolish." 


(Lawrence W. Reed is president of the Mackinac Center for Public Policy.  Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.)


Critics of high-priced pharmaceutical products are missing the bigger picture: Over the past several decades, better, more expensive drugs are making far more expensive treatments such as surgery no longer necessary, in many cases. Michigan lawmakers should stop being "penny-wise and pound-foolish," explain to their constituents why drug prices seem so high, and allow the health-care market to come up with the best treatments for the lowest prices.

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