Drug companies saved my marriage.
Get that smirk off your face, for this is not a tale of Viagra. Two years ago, I asked Pamela to marry me. She said yes, making me a happy man -- arguably the happiest man on Earth. But that tender moment was only possible because of what I am more than willing to call a miracle drug. You see, Pamela owns two cats, and she had made it clear that if I was going to live with her, I was going to have to live with her two cats as well. "I gave up my cats for my first husband, and I'm not going to do it for a second one," she declared.
The problem is that I am allergic to cats. The solution is the new antihistamine Zyrtec, developed by Pfizer in 1995. I take one pill a day and the felines can rub their fluffy tails across my nose without provoking so much as a sniffle. (Zyrtec doesn't cause drowsiness, either.) So now we are living happily ever after in wedded bliss. A month's supply costs $66.25 at my local pharmacy, but what price love?
Yet the development of products such as Zyrtec -- not to mention Viagra and birth-control pills -- has not bought pharmaceutical companies a lot of love. Quite the opposite. When Al Gore listed "Big Drug Companies" along with "Big Oil, Big Tobacco, and Big Polluters" as foes of the American people in his acceptance speech at last year's Democratic National Convention, he wasn't going out on a limb. He was tapping into widespread bad feelings toward pill makers. John Le Carré, the best-selling British writer famous for his Cold War spy novels, casts pharmaceutical companies as the new global villains in his 2000 novel The Constant Gardener. Communist dictators are out as bad guys and drug company CEOs are in.
The pill-pushing industry is now one of the top targets of politicians and much of the public for ire, wrath, and (possibly) regulation. The most frequent complaint is that prescription drugs cost too much, that their costs are spiraling out of control. There's no question that Americans are spending more on prescription drugs than they used to. In 1997, our total spending on drugs increased by 14.2 percent from the previous year; in 1998, it went up 15.7 percent; and in 1999, it rose again by 18.8 percent. During that same time span, the overall inflation rate never rose above 3 percent per annum.
So the drug companies must be gouging patients and health care providers, right? No. Many critics have made the mistake of confusing more spending with higher prices. In other words, prices aren't going up -- we're buying more. Spending on prescription drugs is rising rapidly because Americans like me are buying more pills; our medicine cabinets are bulging with new treatments for whatever ails us.
Between 1993 and 1999, overall inflation rose 19 percent while drug prices increased 18.1 percent . In some years inflation outstripped drug price increases, while in others drug prices rose faster than inflation. For example, in 1996 inflation was 3.3 percent and drug prices increased only 1.6 percent; in 1998, inflation rose 1.6 percent and drug prices went up 3.2 percent. The vast majority of the spending increase on drugs -- some 78 percent -- has occurred because doctors and patients are taking advantage of the more and better drugs that are now available.
During the 1990s, the pharmaceutical industry developed nearly 400 new drugs, many of which act as substitutes for older, more expensive medical treatments. When other industries develop new products that people want -- personal computers, say, or cell phones -- we typically laud them for their innovation and willingly plunk down our money.
So why are pharmaceutical companies in the doghouse, especially since they are making products that save and enrich our lives? The answer includes political opportunism, large doses of ignorance regarding the drug industry's economics, and an entitlement mindset among many consumers. Those are potent sentiments that, in today's policy climate, are particularly troubling. If enacted, the most common proposed solutions to the prescription drug "problem" would actually undermine an industry that has greatly enriched our quality of life.
Just how much are Americans spending on prescription medicines, and what are they getting in return? According to the Bureau of Labor Statistics, the average consumer spends just over 1 percent of her annual income on pharmaceuticals, about the same amount that gets spent on tobacco and alcohol. The elderly, who are by far the largest consumers of medicine, spend roughly 3 percent of their annual income on drugs, about the same amount they spend on entertainment. Households with seniors 65 to 74 years old spend $1,587 on entertainment and $698 on drugs, while those over 74 years old spend $875 on entertainment and $719 on drugs. (The average income for 65-74-year-olds is $28,928; for those over 74 it is $23,937.)
As mentioned before, Americans are indeed spending more on prescription medicines in absolute terms. Average expenditures per household were $301 in 1993 and $370 in 1999. But spending totals aren't the end of the analysis. A more important question is whether we are getting value for our money. According to Columbia University economist Frank Lichtenberg, the answer is absolutely yes. Between 1960 and 1997, life expectancy at birth for Americans rose from 69.7 years to 76.5 years. "Increased drug approvals and health expenditure per person jointly explain just about 100 percent of the observed long-run longevity increase," writes Lichtenberg in a working paper done last year for the National Bureau of Economic Research. Lichtenberg found that for an expenditure of $11,000 on general medical care, there is a gain of one life-year on average. (A life-year in this context is simply an extra year of life that a patient gains by being treated.) However, spending just $1,345 on pharmaceutical research and development gets the same result. Economists have calculated that, on average, people value an extra year of life at about $150,000. (That figure is based on people's willingness to engage in risky jobs.) Assuming an average value of $150,000 per life-year, the benefits from medical care expenditures outweigh the costs by a factor of more than 13; the benefits of drug R&D are more than 100 times greater than its costs. As important, drugs can also reduce health care costs. In "Do (More and Better) Drugs Keep People Out of the Hospital?" -- a 1996 study published in the American Economic Review -- Lichtenberg found that "a $1 increase in pharmaceutical expenditure is associated with a $3.65 reduction in hospital-care expenditure."
The story of stomach-acid-blocking drugs such as Tagamet and
Zantac illustrates how drugs save money by keeping patients out of
the hospital. In 1977, the year in which such drugs were
introduced, surgeons performed some 97,000
operations for peptic ulcers. In 1993, despite population growth, that number had shrunk to 19,000. The shift from surgery to highly effective pills -- a change that has made life better for tens of thousands of people with stomach problems -- is the sort of quiet development that escapes much attention. The Boston Consulting Group's health care practice reported that it saves patients and insurers at least $224 million in annual medical costs.
Other examples abound. In 1991, for instance, the benefits that drugs offered became painfully apparent when New Hampshire, in a cost-saving measure, adopted spending caps on the number of reimbursable medications that Medicaid patients could receive. The result was that nursing home admissions doubled among chronically ill elderly patients and raised government costs for institutional care by $311,000, which was 20 times more than was "saved" by imposing spending caps on drugs. As John Calfee, a drug policy analyst at the market-oriented American Enterprise Institute, has noted, drugs that break apart blood clots cut hospitalization and rehabilitation costs for stroke victims by about four times the cost of the drug. In his recent monograph Prices, Markets and the Pharmaceutical Revolution, Calfee also reports that schizophrenia drugs costing $4,500 per year save more than $70,000 in annual institutional treatment costs.
A yearlong study of 1,100 patients done by Humana Hospitals found that using drugs to treat congestive heart failure increased pharmacy costs 60 percent, but cut hospital costs by 78 percent, for an overall savings of $9.3 million. Better still, the death rate dropped from an expected 25 percent to 10 percent. In Virginia, an asthma study found that new asthma drugs cut emergency room visits by 42 percent. And, relevant to my cat situation, a study by the consulting firm William M. Mercer concluded that every $1 spent on non-sedating antihistamines yielded a $3.07 return to employers, due to increased productivity and reduced accident costs.