Increased Life Expectancy Thanks to "Big Pharma"?

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Wonder why Americans are living longer? Columbia University economist Frank Lichtenberg has an interesting Washington Post op/ed which blames the increase on medical innovation. He compares longevity and the use of modern treatments between states. The result is that states in which people use up-to-date treatments had bigger increases in their residents' average life expectancy. To wit:

To find out why this longevity "increase gap" exists, I examined several factors that researchers generally agree affect life expectancy, including medical innovation, obesity rates, smoking and HIV-AIDS infection rates. While each of these factors had an impact on longevity, the most important factor was medical innovation. In particular, I found that longevity increased the most in those states where access to newer drugs—measured by their mean "vintage," or FDA approval year—in Medicaid and Medicare programs has increased the most.

According to my econometric model, about two-thirds (63 percent) of the potential increase in longevity during this period—the increase that would have occurred if obesity, income and other factors had not changed—can be attributed to the use of newer drugs. In fact, for every year increase in average drug vintage there was an almost two-month gain in life expectancy.

Increasing access to newer drugs was not associated with above-average annual spending on health care; and the use of newer medicines seems to have increased labor productivity (output per employee) by about 1 percent per year, perhaps because of reduced absenteeism from chronic ailments. Overall, my findings contradicted the common assumption that advances in medical technology automatically result in increased health-care expenditures.

The op/ed is based on a Manhattan Institute study being released today. Whole WaPo op/ed here.

Disclosure: As faithful H&R readers know, I own a few shares in a bunch of biotech companies. Why? Because I believe that the desire of people to live longer healthier lives will make them profits which will be reflected in their higher stock prices. Of course, some of the companies I've put my few shekels in will go bust. Finally, in my disclosure for yesterday's column, I didn't know if I owned in shares in companies that make antidepressants. I got around to asking my stockbroker (who is also my wife) last night. She says that I own 50 shares of Pfizer which makes Zoloft. So far I have lost money on that stock.

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  1. Best
    Disclosure
    EVER!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    Maybe its just that it’s been so long that i’ve become disclosure-deprived.

    I think the awesomeness partly resides in disclosing things failed to have been fully disclosed in earlier disclosures.

  2. This is good to see.

    It always struck me how people could blame rising health care costs on the costs of drugs. Presumably, the drugs are fixing something that either cost significantly more to fix before the drug existed or that could not be fixed before the drug existed.

    If a $1000 per year prescription prevents two days in the hospital per year, then that prescription is a clear win in both benefit and cost. If a $1000 per year prescription improves the quality of life of a typical American by 5%, then that too is a clear win in benefit versus cost.

    To worry that $1000 more has been spent on drugs is missing the point.

  3. Obviously, Big Pharma is responsible for Global Warming as well. Damn them for keeping people alive longer.

  4. Overall, my findings contradicted the common assumption that advances in medical technology automatically result in increased health-care expenditures.

    Actually, they seem to contradict the common assumption that advances in medical technology automatically result in inefficient increases in health care expenditures.

    If Mike P’s example above is true, health care expenditures may well be a thousand dollars higher than they otherwise would have been. The cost side has, in fact, gone up – it’s just that the benefit side has gone up even more.

    Of course, if one accepts these findings, then it would follow that increases in the availability of advanced medical technologies to populations that do not currently have access to them would produce a net economic benefit as well.

  5. MikeP: The same Lichtenberg did a study for the National Bureau of Economic Research in 2002 in which he found “in the entire population, a reduction in the age of drugs utilized reduces non-drug expenditure 7.2 times as much as it increases drug expenditure.” In other words, new drugs save 7 times more money than they cost by reducing spending that would otherwise have gone to less effective treatments, doctors, hospitals, operations and so forth.

    Princeton health economist Uwe Reinhardt also noted, “I once calculated that if you rebated all the drug company profits to patients, health spending would only go down by 1.2 percent.” In other words, seizing all drug company profits would do nothing to address the current health care spending “crisis,” but it would shut off the flow of funds to many academic biomedical researchers and drastically slow the discovery and development of new and more effective drugs.

  6. This is a great study. As Mike P points out, increased drug expenditures can lead to lower overall costs.

    Expensive surgery and medical care has been replaced with drugs. For example, as psychiatric medications improved, more and more psychiatric wards closed, and people who would have been in those wards are living productive lives.

    Even today, drug cost are only a small fraction of the health care budget.

    Of course, the politicians focus on the costs of the drugs (and bash big pharma for it), rather than looking at the savings. It never ceases to amaze me that they can continue to get away with this canard.

  7. I got around to asking my stockbroker (who is also my wife) last night.

    Ron literally sleeps with the pharma/wallstreet industrial complex.

  8. And yet, health care costs are indisputably rising.

    Howzat work?

  9. jc: Yes, I do and she’s wonderful. 🙂

  10. All costs are rising.
    That’s what costs do when there’s inflation, however minimal.

  11. joe: Howzat work?

    In part, rising demand. College costs more for much the same reason.

  12. Howzat work?

    I think it’s all the Canadians coming to the US to get needed treatment and bidding up the price.

    That’s my story and I’m sticking to it.

    Serious question… How is the increasingly popular trend of Americans’ traveling overseas for health care accounted for in the spending numbers? Is the airplane ticket counted as a health care cost?

  13. Face thingy guy,

    Health care costs have been rising at several times the rate of inflation for almost two decades now.

    Ron Bailey,

    Where do you theorize that this rising demand comes from – the aging population?

  14. joe,

    My bet is that the damned Boomers are a factor, yes, but there’s also the large number of psychotropic drugs and the stuff that gives you four-hour erections.

  15. The drug that gives you the four-hour erection is pretty cheap. The drug that gets rid of it costs a fortune!

  16. Because I believe that the desire of people to live longer healthier lives will make them profits which will be reflected in their higher stock prices. . . . She says that I own 50 shares of Pfizer which makes Zoloft. So far I have lost money on that stock.

    Ergo the market is trying to tell us that Prozac kills. The market is coming to a different conclusion than those research scientists that the pharma co.’s hired to study antidepressants and suicide. The glorious market on one hand versus the majesty of peer reviewable research scientists on the other. A classic irresistable force versus immovable object situation.
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *does not compute*
    *corporatarian heads explode nationwide*

  17. Doesn’t Pfizer make Viagra?? Not sure how they lose money.

  18. Ergo the market is trying to tell us that Prozac kills.

    Or perhaps the patents for a number of high revenue drugs are about to expire.

    Whatever, Dave W. Half of one, six dozen of another.

  19. The drug that gives you the four-hour erection is pretty cheap. The drug that gets rid of it costs a fortune!

    Rent Exit To Eden. Rosie O’Donell in a corset.

    Think of it as alternative medicine.

  20. And yet, health care costs are indisputably rising.

    Howzat work?

    One thing is the cost of government oversight. The biggest cost of developing a new drug is the cost of getting the FDA to approve it. How much money do hospitals and doctors spend complying with medicare regulations? What about malpractice? You have the cost of not only defending the law suits but investigating claims and insuring doctors. Every person who earns a paycheck working for a medical insurance company is part of “healthcare costs” in the aggregate. It is not only that, it is the cost of administrators and managers to oversee the whole delivery system by ensuring that regulations are complied with, bills are collected and so fourth. Add it all up and you have this whole edifice of bureaucracy sitting on top of the basic cost for treating people. Certainly, some of that is necessary, but if you want to know why costs are rising, I think that is where you need to look, not at Big Pharma.

  21. “Rent Exit To Eden. Rosie O’Donell in a corset.

    Think of it as alternative medicine.”

    wouldn’t PTSD and lifetime mental scaring count as serious side effects to your alternative medicine?

  22. Is this increase of life expectancy adding to the middle or the end of people’s lives?

    (My father’s in good health and still working at age 69 due to modern drugs; My grandfather’s turning 90, and modern drugs have given him at least 10 more years of retirement than he’d have gotten otherwise).

  23. John,

    Did government oversight and the bureacratic costs it imposed increase substantially between 1990 and 2000? Because health care costs sure as hell did.

  24. Or perhaps the patents for a number of high revenue drugs are about to expire.

    Nah. Patents expire at a date certain, which is known long in advance, so stock prices automatically adjust to take this into account long before it happens.

  25. And yet, health care costs are indisputably rising. Howzat work?

    The cost of each item of health care is falling. CAT scans are cheaper every year.
    This is offset by there being many more items available. Now we have MRIs and a couple dozen more internal scanning technologies.

    It’s like consumer electronics. Prices are dropping on individual items, but the amount spent is rising because we’re buying more items.

    We spend millions treating ailments that there didn’t used to be treatments for. Cancer used to be a death sentence. So did AIDS. So did diabetes. So did many of the problems that respond to transplants. Now they are conditions to be (expensively) managed.

    I could go on and on.

  26. Patents expire at a date certain, which is known long in advance, so stock prices automatically adjust to take this into account long before it happens.

    No. Long before it happens, there is the expectation that one of the new drugs in the pipeline will replace the revenue stream. If there are more failures in late medical trials than anticipated — as there have been recently — then those new drugs will not be there to keep revenue flowing after the expiration of other drugs’ patents. Gaps in the revenue stream become increasingly visible only as the expiration of patents nears.

  27. I’ll go on the record as saying I find Rosie O’Donnell to be extremely cute. I’d hit that.

    Back to your regularly scheduled thread.

  28. Of course, if one accepts these findings, then it would follow that increases in the availability of advanced medical technologies to populations that do not currently have access to them would produce a net economic benefit as well.

    A shame we’re going to get socialized medicine instead. Would have been nice for the poor to get quality health care.

    And yet, health care costs are indisputably rising.

    Howzat work?

    I suspect that a large part of the expenditure comes from the limited supply of doctors and nurses. In the face of a growing demand for health care workers, the AMA has maintained the supply at below what the market would bear to prop up doctors’ salaries. Of course, this is done in the name of “not reducing quality,” ignoring that many of the tasks that require doctors don’t require the full complement of skills doctors learn. The solution would be to find a way to raise the supply of doctors and nurses. Completely deregulating this would be ideal, but would require something like UL to vet doctors. I don’t know what the realistic solution would be, but something other than letting doctors essentially set their own wages would be a start.

  29. Maybe it’s fear of socialized medicine that driving down the stock price. An industry that portions of the political structure want to nationalize (or severely impact the profits of) is not a very attractive industry to investors.

    Or, in other words, any one here want to invest in a Venezuelan oil company?

    (Disclosure: I take a handful of pills a day to stay alive and am happy with my current health care. I owe my life to a number of horrible corporations.)

  30. Ellie,

    It already got hit. A number of times. In the face.

    But to each their own…

  31. grylliade,

    Would have been nice for the poor to get quality health care.

    With money seized at GUNPOINT! *sob*

    In reality, it’s likely that we’re going to get socialized health insurance, not socialized health care.

    I don’t know what the realistic solution would be, but something other than letting doctors essentially set their own wages would be a start.

    A good amount of the work that doctors used to do has been shifted to less-costly health care providers, such as Nurse Practitioners and Nurse Midwives, so that’s a start. This doens’t seem to have reduced the quality of care. So that’s a start.

  32. Back to your regularly scheduled thread.

    Oh, yeah, right.

  33. Zoloft is available generically now, so Pfizer isn’t really making meaningful money on it anymore.

    As such, your clear conscience can be… err… clear

  34. Joe,

    Med mal and medicare and FDA costs have certainly gone up since 1970. The costs of administrating a hospital are a lot more than they used to be. That combined with LarryAs very cogent points, I think account for the increases.

  35. Where do you theorize that this rising demand comes from – the aging population?

    Exactly what I was thinking.

    1. Big Pharma increases life expectancy with better drugs.
    2. Longer life expectancy leads to aging population.
    3. Aging population leads to higher health care costs.

    There you have it: Big Pharma (and geezers who don’t know enough to call Dr. Kervorkian) is causing health care costs to rise.

  36. grylliade,

    I wish the legal profession would create huge barriers to entry ? la the medical profession. Oh, we have some barriers, and we’re willing to execute paralegals if they get out of line, but we’re positively laissez faire compared to the doctors.

    I need a huge salary. In fact, I need a grant so that I can research the lifestyles of the don’t-have-to-work.

  37. John,

    Medical malpractice, while it may hit individual doctors hard, is in the aggregate a vanishinly small portion of health care costs, a rounding error in the increases we’ve seen.

    I can see FDA costs rising, but that is as part of the new drug development process, and is accounted for in the cost of the drugs that, according to this study, reduce overall medical costs.

    Hospital admin costs – interesting. HMOs have absurd overhead costs, too.

    Larry A’s points about more and better techniques and devices seems intuitively correct, but why would this not work the same way as the “expensive” new drugs that actually cost money?

    Personally, I don’t have a problem with health care spending rising. We’re a rich society, and spending money to make people healthier is a good thing. I just wish we were getting more bang for a our buck, and didn’t have to jockey with freaking Slovenia (Slovenia!!!) in rankings of health care outcomes.

  38. And yet, health care costs are indisputably rising.

    Howzat work?

    A pair of artificial knees done twice in a lifetime is substantially more than the purchase and upkeep on a wheelchair.

    All Hail the rising health care costs. I am definitely for them.

  39. Hey, that makes two of us!

  40. The fundamental reason that health care costs rise as fast as they do is that the marginal benefit of the next dollar spent is greater than one dollar. It is that simple.

    And there is no reason to expect it to be anything else. The consumer surplus from better health and a longer life is staggeringly high. One should not be shocked to find that every bit of GDP improvement year to year goes to health expenditures. Nor should one be shocked to find that as other things people buy get cheaper, the savings from those purchases goes to health spending.

    Examples posited for rising health care costs due to state interference are often about transferring greater and greater portions of that huge consumer surplus to the producer than would be transferred in a free market. This exhibits itself in higher prices. But the marginal dollar still buys more than a dollar’s worth of health.

  41. Gilmore said it first: best, most clear, most reasonable (ahem) disclosure yet seen on teh Interawebs.

  42. For example, as psychiatric medications improved, more and more psychiatric wards closed, and people who would have been in those wards are living productive lives.

    That is if you count being a slave as a “productive” life. Psychiatric medications are not “improving”. They are getting better at turning off your brain so you can make more money to pay for the “new and better” drugs.

  43. If there are more failures in late medical trials than anticipated — as there have been recently — then those new drugs will not be there to keep revenue flowing after the expiration of other drugs’ patents.

    Or unexpected problems with existing drugs. Which brings us back to my original (somewhat tongue in cheek) post about how some people think there is a problem with antidepressants and others don’t.

  44. tros,

    My mother is a retired psyche nurse.

    She has seen people who needed to be restrained from killing themselves develop the ability, for the first time in years, to sit down and have a conversation because of the medication they took.

    There are sick and wounded people out there whose sanity and even lives have been saved by psychiatric drugs.

  45. tros, you should count yourself fortunate that you could express such a mistaken thought.

    A person with a severe mental illness is a slave, a slave whose self-determination has been taken away from him. Cures and treatments for these curses are freedom.

  46. tros, you should count yourself fortunate that you could express such a mistaken thought.

    I recognize that there are people with severe illnesses, but pharmaceutical companies make a lot of money by brainwashing people, particularly children. I suppose the blame for this must be shared with the mental health “professionals” who overprescribe.

    Cures and treatments for these curses are freedom.

    A person who has to pay through the nose for their freedom is still a slave. For mood disorders, particularly depression, the pharmaceutical “cure” or “treatment” often does *nothing* to alleviate depressive symptoms. The diagnosis is meant to foster dependency and helplessness.

    There are sick and wounded people out there whose sanity and even lives have been saved by psychiatric drugs.

    This is true, but these people are in the minority of those who are on the receiving end of the state-enforced mental health system.

  47. And yet, health care costs are indisputably rising.

    Howzat work?

    Gee IDK…lets see a rising demand…cuz it works and more people are getting to be the dieing age and lets see what else….oh yeah a government mandated health regulatory system that requires customers to get health care from the commons rather then paying for it themselves so there is no market competition to check prices.

    Hey joe ever wonder why corrective laser eye surgery which is not payed for by insurance is so cheap? It is almost as if an invisible hand is keeping prices low.

  48. “Wonder why Americans are living longer?”
    Living longer than whom?

    If you look at life-expectancy, we’re far below many nations with socialized systems. It seems strange to think that the richest nation on earth, if we truly had such a great system, could not manage to perform as well as other nations that have such horrible systems.

    But ignoring evidence that doesn’t fit your thesis is pretty common amongst pundits and politicians alike. It’s why we have a non-functional healthcare system that allows 18,000 Americans to die needlessly each year and spends more than any other nation for less benefit.

    And for that privilege, I can’t turn on the TV without admitting a drug pusher into my home. I pay thousands of dollars a year to see a doctor once and find out that like most 20-somethings, I’m in good health. What’s not to love about our system?

    Oh yeah. All of the above.

  49. Ron’s argument can be made of *any* monopoly. The monopolist must price his product below the utility the buyer expects to get from it. He can still set the price far above what would prevail in a free market, thanks to statist market entry barriers like patents that prevent competitors from driving the price down toward production cost.

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