Calculating the Benefits of Drugs

While pharmaceutical companies are under pressure from Congress to explain high costs, Professor Frank Lichtenberg provides evidence that drug costs are more affordable than we realize.

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Humans are living longer, better lives thanks to innovations in prescription drugs over the past three decades, according to several new studies by Frank Lichtenberg, the Courtney C. Brown Professor of Business.

Every year, according to Lichtenberg’s research, drugs launched since 1982 are adding 150 million life-years to the lifespans of people in 22 countries that he analyzed. He calculated the average pharmaceutical expenditure per life-year saved at $2,837 — a bargain, he says.

“According to most health economists and policymakers, if you could extend someone’s life by a year for less than $3,000, that is highly cost effective,” says Lichtenberg, who gathered new data for these studies to cast a never-before seen view of the econometrics of prescription drugs. “People might be surprised by how cost-effective drugs appear to be in general.”

Lichtenberg’s research comes at a critical moment, as Congress is now putting increasing pressure on pharmaceutical giants to account for high drug prices. The Senate Finance Committee is conducting pricing hearings with manufacturers AbbVie, AstraZeneca, Bristol-Myers Squibb, Johnson & Johnson, Merck & Co., Pfizer, and Sanofi, while the House Committee on Oversight and Reform is conducting a separate investigation into drug costs.

But while soaring drug costs have prompted dozens of states to pass bills to curb rising prescription drug costs, Lichtenberg counters that people are also living longer than ever before thanks to new drugs. The average life expectancy at birth increased to 72 years in 2016 from 66.5 years in 2000. Lichtenberg wanted to know: Exactly how much of this additional lifespan is attributable to pharmaceutical innovation?

Extending Lives

To tease out the answer, the professor gathered data on drug launches and the age-standardized premature mortality rate by country, disease, and year. Drawing on data from the World Health Organization, the United Nations, consulting company IQVIA, and French database Theriaque, Lichtenberg was able to identify the role that pharmaceutical innovation played in reducing the number of years of life lost due to 66 diseases in 27 countries. (“Years of life lost” is an estimate of the average years a person would have lived if he or she had not died prematurely.)

Between 1982 and 2015, for example, the US saw the launch of 719 new drugs, the most of any country in the sample; Israel had about half as many launches. By looking at the resultant change in each country between mortality and disease, Lichtenberg calculated that the years of life lost before the age of 85 in 2013 would have been 2.16 times as high if no new drugs had been launched after 1981. For a subset of 22 countries with more full data, the number of life-years gained in 2013 from drugs launched after 1981 was 148.7 million.

“Millions of life-years have been saved,” says Lichtenberg.

Pharmaceutical expenditure per life-year saved is $2,837, or about 8 percent of per capita gross domestic product, according to Lichtenberg’s paper, titled “How many life-years have new drugs saved?” This cost is likely an overestimate because the prices of old drugs tend to rise more slowly when new drugs enter the market, as Lichtenberg lays out in a new working paper, titled “The effect of new drug entry on old drug prices in the US.” Calculating the effect of new drug entry on old drug prices in the US from 2010 to 2016, Lichtenberg found that inter-brand competition from new drugs reduced the price of “old drugs” (those launched before 2011) in 2016 by between 5 and 12 percent.

“When new drugs entered the market, the prices of old drugs rose more slowly,” says Lichtenberg. “The idea is that when a new brand enters the market, that puts downward pressure on the prices of the drugs in the same market for the same disease.”

Improving Lives

Pharmaceutical drugs aren’t just extending lives, adds Lichtenberg, they’re also improving overall quality of life. In another study published in January in Disability and Health Journal, the professor analyzed the correlation between drug launches and reduced physical disability. Looking at data across 11 European countries, Lichtenberg concluded that drug launches during 1982 to 2015 reduced the probability of severe limitation in 2015 by 4.9 percentage points, reduced the probability of any limitation by 7.7 percentage points, and reduced the mean number of Activities of Daily Living limitations by about 29 percent.

“We care not only about mortality or longevity, but we care about quality of life, or disability,” says Lichtenberg. “The greater the relative availability of drugs in different countries for specific diseases, the less likely people are to be disabled from that disease in that country.

In light of these benefits, Lichtenberg cautions against government policies that might limit pharmaceutical innovation. He also suggests that countries lacking wide access to medical drugs reconsider their reimbursement policies to make themselves more attractive for new drug launches — a timely advisory as the US Congress investigates drug prices.

“The hearings in the House and Senate are about the cost of the drugs without really an assessment of the benefit,” says Lichtenberg. “We need to think about what the benefits are, especially in countries where there are a relatively limited number of new drugs being launched, because those countries may be foregoing some of the public health benefits of pharmaceutical innovation.”

About the researcher

Frank Lichtenberg

Frank R. Lichtenberg is Courtney C. Brown Professor of Business at the Columbia University Graduate School of Business; a Research Associate of the National...

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