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Event Transcript
December 9, 2003

Better Health, Longer Lives: The Case for Paying for New Drugs

MR. ROBERT GOLDBERG: The mission of the Center for Medical Progress at the Manhattan Institute is to articulate the importance of medical progress and the connection between free market institutions and making medical progress both possible and widely available throughout the world. We believe that it is crucial to develop market-based policies that sustain medical progress and medical innovation. This lecture is one of a continuing series on the future of medicine that focuses on how market innovation improves human health and productivity both in the U.S. and abroad.

Today’s speaker, Dr. Frank Lichtenberg, is an economist who focuses on health care, particularly on the effects of drug utilization on human health. Dr. Lichtenberg’s research recognizes that expanding patient choice, investing in medical innovation, and encouraging health plans to compete on and be compensated for providing better medical care is the future of medicine.

The research of Dr. Lichtenberg and other scholars shows us that the future of medicine is now, and it is a bright future for humanity. Drug and biotech companies are already developing the next generation of medicines based on a better understanding of human biology and disease mechanisms at the individual level, an innovation that promises to provide a patients with therapies tailored to their individual physiologies. This is a quantum leap in medicine because we now know that patients are very different even within the same diagnostic criteria, and that the same disease may require different treatments from patient to patient.

Our health care system must respond to this revolution and invest in these innovative individualized treatments. Indeed, as medical science continues to progress, more and more people are going to be taking an increasing number of new drugs, and overall drug spending will increase as a result. In fact, more people will undoubtedly become consumers of high cost medicines, a trend that is already occurring in the Medicare population (where users of high cost drugs are the fastest growing segment).

Nonetheless, we need to keep this trend in perspective. Drug spending will undoubtedly rise, but this is a good thing on net because new medicines will continue to displace other forms of less effective care, or be developed to treat illnesses for which there are currently no remedies.

This transition is not without precedent. At the time that the polio vaccine was first being developed, hospitals around the country were constructing new wings to treat polio victims. Those wings were made obsolete the moment the polio vaccine came to market. The same is largely true of tuberculosis wards. In both cases, rising drug costs signified a real advance for human health.

Now, there are still some people who believe that drug innovation is unaffordable, but, as Frank Lichtenberg’s path breaking research has demonstrated time and again, this is not true. Drug treatment does not increase overall health spending; it decreases it, and decreases the total cost of care in many cases. In reality, Dr. Lichtenberg suggests that in come cases drug spending by Medicare will reduce total health care spending for each person by a factor of $8 for every one dollar spent on new medicines. Today, Dr. Lichtenberg will show how drug innovation—specifically new drug launches—lengthens and improves the quality of life while increasing productivity.

His research shows how nations, when they delay or deny access to new medicines in the name of cost containment, or engage in grandstanding against pharmaceutical and biotech companies to make a political statement, do so at the expense of the public health, particularly their sickest and most ill citizens

I am very pleased to introduce the winner of the Schumpeter Prize and the Courtney C. Brown Professor of Business at the Columbia University Business School, Dr. Frank Lichtenberg.

DR. FRANK LICHTENBERG: I have been doing work for a number of years on medical innovation, especially pharmaceutical innovation. It is not that I have anything against medical devices, new surgical procedures or other kinds of medical innovation, but I am an econometrician who focuses on trying to measure the benefits of medical innovation and it just so happens that we can measure the impact of drugs much better than we can measure other kinds of new medical treatments.

I have done a number of studies on this topic, but what I would like to talk about today, briefly, is one of my most recent projects in this area, a study entitled The Impact of New Drug Launches on Longevity: Evidence from Longitudinal Disease-level Data from 52 Countries, 1982-2001.

Let me first say that conventional wisdom is changing in regards to this general subject. In the past, when economists have thought about economic development, the metric they used was simply per capita GDP. If we wanted to measure how much better off we are today than we were 50 years ago, we simply looked at the increase in per capita GDP. But I think many economists and others have begun to appreciate how inadequate a measure of economic progress this really is.

This is reflected in the Human Development Index, formulated by the United Nations. This index is actually based on three different variables; one is per capita GDP, but the other two variables are education (an index of educational attainment) and a life expectancy index. This last variable reflects the idea that living longer, as well as having high per capita income, contributes to human welfare.

Recently, an economist at Yale University, William Nordhaus, has done a calculation and he concludes that (as a first approximation) the economic value of the increases in longevity over the 20th Century is about as large as the value of measured growth in non-health goods and services. In other words, we are really underestimating U.S. economic growth by a factor of two, if we fail to account for increased lifespan.

The increase in lifespan has been truly impressive. Back in 1950, life expectancy at birth throughout the world was about 47 years; by the end of the century it was 65 years. This represents a 40 to 50% global increase in life expectancy in the second half of the 20th Century.

Moreover, life expectancy has been growing more rapidly in less developed countries than it has in the more developed countries. At mid century the gap between the rich and the poor countries in life expectancy was 25 years. By the end of the 20th century it was about half that.

There has been a convergence in life expectancy, or a narrowing gap in longevity between the developed and developing nations. This is in stark contrast to per capita GDP where, if anything, the gap between rich and poor countries has continued to widen.

Why has human longevity been going up? It could be due to two kinds of factors. One factor is improved quality of, and access to, medical care. The other factor is “everything else,” including increases in income, education, nutrition, sanitation and so forth.

This is where conventional wisdom enters the picture again. I teach a course at Columbia called the Economics of Health Care & Pharmaceuticals, and have occasion to look at textbooks on health economics. A glance at four major textbooks shows that the conventional wisdom in all of them was that improvements in medical care had very little to do with improvements in health.

For example, one textbook said, “The overall contribution of medical care to health is rather modest at the margin.” Another said, “Increase in life expectancy has been much more influenced by economic development than improvements in medical care.” And so on.

The cliché expressed in conventional wisdom is that medical care in general has not made much of a difference in human health or longevity and, therefore, medical innovation or drug innovation in particular has not made much of a difference either.

Now, I found that last judgment to be quite puzzling because we read very frequently of miraculous new drugs that are approved and the clinical evidence suggests that these drugs do increase survival rates and quality of life.

The difference between clinical observation and conventional wisdom struck me as very odd, and so I decided to take a closer look at the evidence. Essentially, I designed a study in which I collected data by country, disease and year on two trends: mortality and the introduction of new drugs.

We have very good data on both of these factors. The mortality data comes from the World Health Organization, which provides us data on the age distribution of deaths by disease, country and year. For example, we know the number of women who died of breast cancer in Norway in 1980, how many of them were over 65, how many of them were under 50, etc. We have data like that for many different diseases for basically every country in the world going back for twenty or thirty years. This is an unusually rich dataset on mortality, and we have the United Nations World Health Organization to thank for it.

Fortunately, we also have very good data on new drug introductions, that is, the launches of new drugs. There is a company called IMS Health that monitors the pharmaceutical industry worldwide and it tracks new product introductions in about seventy different countries, and it has been doing this for about twenty years. Thanks to IMS, we can identify every new drug that has been introduced in seventy countries over the last twenty years. Currently, the database contains over 165,000 records of new drug introductions throughout the world. This database includes launches of old drugs (e.g., generic drugs) and launches of new molecular entities. It is, of course, the latter data that I am primarily interested in.

Take, for example, a new drug called Tenecteplase, a cardiovascular drug. This drug was first launched in the United States in June of 2000 according to IMS. It was subsequently launched in six other countries by the middle of 2002, but it had not been launched anyplace in the world except those six countries by the middle of 2002.

This pattern is very typical of new drug releases. A new drug is launched somewhere, but it is not launched simultaneously around the world. This makes it very easy to control for the impact of new drug launches and to study their effects.

The question I asked in this study is how does the amount and timing of new drug launches affect longevity as measured by World Health Organization mortality data. Again, I measured the impact of new drug launches at the disease level. I wanted to make sure that I controlled for unobserved country effects, that is, variables such as income, education and so forth that it is crucial to control for in examining the impact of new drug launches. This was relatively easy to do, since I conducted the analysis at the disease level and I used data for a number of different diseases.

In terms of some important summary statistics, if one looks at which countries had the most new drug launches and the fewest new drug launches over this period, the United States, Japan and the UK all had about 400 new molecular entities launched over the last twenty years, i.e. about twenty new drugs per year were launched in those countries.

However, in countries like Malaysia, Egypt and Saudi Arabia, there were only about half or even fewer as many new molecular entities launched. In those countries, people have much more restricted access to new drugs than people in the countries with a larger number of drug launches. (For people who are interested in the detailed data, my complete study is available from the website of the National Bureau of Economic Research where this and other papers are posted.

What I found was that launches of new chemical entities, which are the most important kinds of new drug approvals, have a strong positive impact on the probability of survival. Now, it takes at least three years for new drug launches to have their maximum impact on survival rates.That’s not surprising because a new drug might be launched today in the U.S. but it is not going to be widely used throughout the healthcare system for some period of time, so it is entirely plausible that there will be a lag between new drug introductions and their mortality impact.

Interestingly, I also found that launches of older drugs that are not new chemical entities, such as generic drugs, do not seem to have any impact on longevity. In short, new drugs increase longevity but the re-launch of existing drugs does not.

How much of a difference do new drugs make? Or rather, how much of the increase in longevity that we have seen during the last fifteen to twenty years can be attributed solely to the introduction of new drugs?

In order to arrive at this figure I showed that between 1986 and 2000, the average life expectancy in the sample of countries that I examined increased by about two years. My estimates imply that new drug launches account for about 40% of that increase, or 0.8 years.

In other words, my estimates imply that the people alive in the year 2000 can expect to live 8/10ths of a year longer than people alive in 1986 because of the new drugs that were launched between 1986 and 2000. A 0.8-year increase in longevity over a 14-year period turns out to be an average increase in life expectancy attributable to new drug launches of about three weeks every year. This is my key finding: new drugs increase the longevity of the average person by about three weeks per year.

This is certainly a piece of good news, but it isn’t where we should end our analysis. An additional factor to consider is that new drugs can sometimes be very expensive, and so while there may be a benefit to new drugs, how much does society have to pay to achieve this benefit?

The way health economists approach this question is to ask, what is the cost per life year gained from the launch of new chemical entities? When new drugs are launched, they allow people to live longer. If one person gets to live one year longer, then that’s a gain of one life-year. Consequently, I tried to calculate the cost per life year gained from the launch of new chemical entities.

The way that I did this was first to observe that in 1997, the average per capita pharmaceutical expenditure in OECD (Organization for Economic Cooperation and Development) countries, that is the developed countries, was about $250. The average person in the developed world spent about $250 per year on pharmaceuticals.

Now, as I told you a minute ago the average annual increase in life expectancy resulting from new drug launches is about three weeks. So, if I simply take the ratio of $250 divided by three weeks, that implies that pharmaceutical expenditure per person per year divided by the increase in life years per person per year attributable to new drug launches is about $4,500. That means, roughly speaking, that it costs about $4,500 to increase one person’s life by one year. This is far lower than most estimates of the value of a life year.

There is extensive economic literature in which economists try to infer from people’s market behavior how much they are willing to pay to live longer. For example, we observe that people get paid more to work in dangerous occupations than they do to work in safe occupations. That’s presumably because employers have to compensate workers for bearing increased mortality risks. From those studies one can try to infer a willingness to pay to live additional years.

The numbers that emerge from studies of the United States are that individuals are willing to pay about $150,000 to live one additional year. That’s certainly a very big number. However, even in less developed countries like India and Taiwan the figures are quite large, and are quite a bit larger than my estimate of the cost per life year gain from the launch of new chemical entities—about $4,500. That’s well below the U.S. figure and even the figures for other developing countries.

Moreover, in the $4,500 estimate, the numerator in that ratio includes expenditure on old drugs, as well as on recently launched new chemical entities. If anything, it probably grossly overstates the cost per life year gained from the launch of new chemical entities.

The study that I just described was a study at the macro level, because I was looking at the country level. I also have had the opportunity to examine the effect of new drugs on mortality or longevity using very, very micro level data from a Medicaid program. I was able to get data from a particular Medicaid region, which I am not yet at liberty to disclose, and I had access to data on over half a million people. Altogether, those people had about 12 million claims including pharmaceutical claims, hospital claims and so forth.

Using this population, I looked at the effect of what I call the vintage of drugs they were using on the probability that those people died during a three-year period. Since I had very detailed data about the particular prescriptions used by each person, I was able to calculate, for example, what percent of the drugs that a person was using were approved by the FDA before 1970, before 1980, before 1990 and so forth. With these data I was able to calculate how new or old the drugs that a particular individual was using, and I linked that to information about whether the person survived for the next three years.

After controlling for a variety of demographic and other factors I found that people using newer drugs were significantly more likely to survive than people using old drugs (again, controlling for age, sex, region, utilization of medical care and the nature of the person’s illnesses).

For example, a person who was taking drugs that were entirely approved before 1970, had a three-year mortality rate of 4.4%, whereas somebody taking drugs entirely approved during the 1990’s had a three-year mortality rate of 2.5%, almost half of the mortality rate of the person consuming much older drugs. This effect was present even within various disease areas like circulatory disease, endocrine diseases (includingdiabetes), and cancer.

So, these data, which are at a very micro level, corroborate the more aggregate data that I described earlier. Taken as a whole, the micro and macro level data turn the conventional wisdom on its head: new drug launches are significantly correlated with increases in longevity, and, my other research indicates, with increased productivity. This doesn’t end the analysis, but it does suggest that societal investment in new pharmaceutical products produces benefits that far outweigh their costs.


Center for Medical Progress.



The average human lifespan increased dramatically during the twentieth century. While economic development certainly contributed to this trend, there is also a growing body of evidence that new medical treatments-particularly pharmaceuticals-played a critical role in extending longevity and increasing productivity. In this edited transcript, Dr. Frank R. Lichtenberg, professor at the Columbia University Business School, discusses his own new research showing that societal investment in new medicines pays significant dividends in increased longevity. By comparing the launches of new drugs and disease-level data across 52 countries from 1982-2001, Dr. Lichtenberg is able to show that new drugs increase the longevity of the average person by about three weeks per year at relatively little cost.


Robert Goldberg, Ph.D., Senior Fellow, Manhattan Institute; Director, Center for Medical Progress


Dr. Frank R. Lichtenberg, Courtney C. Brown Professor of Business Columbia University Business School

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