I Want a New Drug

Pharmaceutical spending

Ronald Bailey from the February 2009 issue

Marcia Angell, former editor of The New England Journal of Medicine, has argued that Americans spend so much money on pharmaceuticals partly because many of the drugs people now take “are more likely to be expensive new ones instead of older, cheaper ones.” But a new study from the Manhattan Institute suggests the extra money is well spent.

Columbia University economist Frank Lichtenberg analyzed patterns in the dispensing of prescription drugs in 49 states between 1995 and 2004. He examined Medicaid prescriptions in 30 different therapeutic groups and used Food and Drug Administration data to determine the year each drug went onto the market. He then looked at disability trends in each state.

States that adopted new drugs more rapidly, Lichtenberg found, had the smallest increases in disability rates. And those newer drugs kept 418,000 additional people off the disability rolls in 2004, saving Social Security $4.5 billion. According to a separate 2002 study Lichtenberg did for the National Bureau of Economic Research, newer medicines reduce other medical expenditures, such ashospitalization and physician visits, by more than seven times the extra amount consumers spend on the drugs.