Putting the Costs of New Medicines in Perspective

The cost of new medicines may be balanced by savings in other health care expenses.

Pricey new medications are often blamed for the rising costs of health care in the United States. But this criticism doesn’t take into account the big picture of health care spending—new, better medicines, in fact, often reduce other medical expenses.

In a study published in Economics of Innovation and New Technology, for instance, researchers analyzed how medical innovation affected medical expenditures in Sweden between 1997 and 2010. They found that innovative new treatments reduced the average number of days spent per hospital visit by about 12 percent. The estimated savings almost completely cancelled out the cost of the new medicines during this period.

Similar findings have been seen for other countries, including the United States. “I’ve done a number of studies that have demonstrated that the use of newer drugs—while it does increase the pharmaceutical expenditure—very often reduces other kinds of medical expenditure,” Frank Lichtenberg, professor of business at Columbia University Graduate School of Business and co-author of the study, said. These medical expenses include nursing home costs, doctor’s office visits, home health care and emergency room visits.

Treatment Options vs. Average Length of Hospital Stay

Other researchers have found a correlation between increased access to prescription medication and hospitalization rates. A recent study by John Hopkins researchers, for example, found that Medicare Part D prescription drug coverage reduced hospitalization rates by 8 percent. This reduction resulted in an annual cost savings of $1.5 billion for the U.S. government program.

According to a recent study by the IMS Institute for Healthcare Informatics, new treatment options are making patients healthier in a variety of disease areas, including oncology, hepatitis C, multiple sclerosis and diabetes. As a result, there has been a shift in spending of health care dollars, away from doctor offices visits, hospitalizations and long-term care facilities and toward new medications.

The use of newer drugswhile it does increase the pharmaceutical expenditurevery often reduces other kinds of medical expenditure.

Oral cancer treatments provide an excellent example. Cancer patients have traditionally received therapy through intravenous infusions, but now many can choose oral alternatives. Since they can be taken at home, oral cancer medications—which can be equally effective and often have fewer side effects—reduce the need for hospital visits, thereby cutting costs for supplies and other expenses. Potential cost reductions can be even more significant in hospitals, where the costs for IV drug administration average 189 percent of those charged by private physician offices.

These cost offsets can often be easily overlooked. The need for deeper analyses to uncover them can lead to an unbalanced view of medication costs and to poor policy decisions about how best to manage health care spending.

When the cost of new treatment options is put in proper perspective, the benefits of medical innovation often exceed the costs. “We should not look at pharmaceuticals or pharmaceutical expenditure in isolation,” Lichtenberg said. “They should be considered in conjunction with other medical expenditure.”