PHARMACEUTICAL ECONOMICS AND POLICY COUNCIL

PEPC Briefs

Brief 2004 No. 2
Brief 2004 No. 1
Brief 2003 No. 4
Brief 2003 No. 3
Brief 2003 No. 2
Brief 2003 No. 1

In This Issue:

Technical Progress and Declining Mortality
Cutler and colleagues synthesize historical, cross-country, and within-country evidence to identify determinants of health. They conclude that knowledge, science, and technology are central to a meaningful explanation of declining mortality, and downplay a direct link between income and health.

Antihypertensive Drugs and Cardiovascular Health Outcomes
From a broad synthesis of the impact of science and technology on health, we turn to a specific example. Cutler and colleagues quantify the impact of antihypertensive medications on the risk of heart attacks, strokes, and death. Their results suggest that antihypertensive therapy has pre-vented nearly 90,000 premature deaths from cardiovascular disease and more than 800,000 hospitalizations for stroke and heart attacks.

Intensive Medical Care and Disability
Between 1984 and 1999, the percent of the elderly population reporting difficulty with activities associated with independent living fell by one-fifth. In their paper, Cutler, Landrum, and Stewart find that approximately 20% of this decline in disability is attributable to medical advances in the treatment of cardiovascular disease.

In This Issue:

Aggregate Effects of Health Insurance
Finkelstein exploits the regional variation in private insurance for the elderly prior to Medicare’s introduction in order to estimate the program’s effect on health care spending. She finds the introduction of Medicare is associated with a 23% increase in total hospital expenditures between 1965 and 1970 for all ages.

Impact of Health Insurance on Utilization and Health
Card, Dobkin, and Maestas estimate the impact of Medicare coverage on access to care, preventative care, doctor visits, and hospitalizations. They find that access to care improves most for groups with the largest gains in insurance coverage, although hospital admissions increase most dramatically among those with prior insurance.

Medicaid Enrollment and Child Health
Using a unique data set that combines data on Medicaid outreach efforts and administrative data on Medicaid enrollment and hospitalizations, Aizer examines factors associated with enrollment and estimates the effect of enrollment on avoidable hospitalizations. The results suggest that a 10% increase in Medicaid enrollment leads to a 3% reduction in avoidable hospitalizations.

In This Issue:

Generic Drug Industry Dynamics
Reiffen and Ward find that in markets with higher expected returns, more generic firms enter and enter more quickly. Furthermore, generic drug prices fall with the number of competitors but remain above long run marginal costs until more than 8 competitors enter. They also examine the cost of some pharmaceutical regulation.

Uncertainty and Learning in Pharmaceutical Demand
Crawford and Shum use a rich panel data set to measure the effects of uncertainty and learning in the demand for pharmaceuticals. They estimate a dynamic matching model of demand under uncertainty in which patients learn from prescription experience about the effectiveness of alternative drugs.

Family Spillover Effects in Cost-Effectiveness Analysis
Basu and Meltzer theorize that the cost-effectiveness of treatment decisions may change substantially when spillover effects within the family are considered. They test the theory using a decision model of treatment strategies for localized prostate cancer and by analyzing observed treatment decisions of prostate cancer patients in the SEER database. They find that married men are more likely to choose treatment (over watchful waiting) than single or widowed men.

In This Issue:

Health Insurance and Outcomes
Doyle examines the effect of health insurance on treatment and outcomes following an unexpected health shock—severe automobile accidents where incapacitated crash victims have little choice but to receive medical care. He finds that the uninsured receive 20% fewer days of care, incur 22% lower facility charges and have slightly higher mortality. The estimates are smaller than previously reported, suggesting that earlier estimates may have been inflated by people who purchased health insurance because they needed health care.

Health Insurance and Access to Care
Using trained research assistants posing as patients who need follow-up care for potentially serious conditions, Asplin and colleagues determine the accessibility of timely follow-up care for those in need, and how access is influenced by the type of insurance coverage. They find that having insurance is associated with access to timely care but that it does not eliminate the difficulty in obtaining urgent follow-up appointments.

Health-Related Behaviors
Why do people behave in ways that adversely affect their health? Cutler and Glaeser explore competing explanations for differences in smoking, drinking, and other health-related behaviors. Their results suggest that differences in discount rates or the value of life do not drive behavior. Instead, they find that genetic differences play an important role in health-related behaviors and suggest that chance encounters with a particular peer group may matter as well.

In This Issue:

Health Care Spending
As per capita income rises, consumption rises, but health spending rises even faster. Hall and Jones explain that this is rational if the additional utility we derive from health spending is greater than that for other consumption. They project that the share of income spent on health will reach 34% by the middle of the century.

World Inequality
Becker, Philipson, and Soares find that improvements in life expectancy helped reduce welfare inequality across countries throughout the post–World War II period. Additionally, they decompose changes in life expectancy into changes attributable to 13 broad groups of causes of death and 3 age groups. They find that the reduction in life expectancy inequality is largely due to decreased mortality for young people from infectious, respiratory, and digestive diseases, congenital, perinatal, and “ill-defined” conditions.

Health Inequality
Skinner and Zhou examine health care inequality using three measures: spending, survival, and rates of effective care. They find that relative growth in health care spending for the low-income elderly has not translated into relative improvement in survival or rates of effective care.

In This Issue:

Me-Too
Research by DiMasi and Paquette suggests that manufacturers rarely intend to develop “me-too” drugs. Most follow-on drugs were in development prior to the approval of the first drug in the class. Furthermore, first in class is not necessarily best. One third of follow-on drugs were assigned priority status at FDA because of novelty or unmet need.

PDUFA
Berndt and colleagues find that the Prescription Drug User Fee Act has had a significant impact on reducing drug approval times. “Of the 10 month decline from about 24 months in 1991 to 14 months in 2002, about 60% is attributable to the enactment and implementation of PDUFA.”

Cost Sharing and Compliance
Research by Dor and Encinosa indicates that insurers may be able to reduce overall medical costs by switching from coinsurance to copayments in prescription drug plans.

In This Issue:

Pharmacy Benefits and the Use of Drugs by the Chronically Ill
Goldman and colleagues find that doubling copayments leads to reductions in pharmaceutical use of at least 25% and as much as 45% for 8 therapeutic classes. Chronically ill patients are, however, less responsive to copayment changes. Nevertheless, significant increases in copayments raise concerns about adverse health consequences, especially for patients with diabetes, asthma, or gastric acid disorder.

Does Misery Love Company?
Lichtenberg and Waldfogel provide evidence that market size (measured as disease prevalence) affects consumption and longevity. They use the 1983 Orphan Drug Act (ODA) as a source of exogenous variation in market size relative to fixed costs. They find that the ODA induces manufacturers to create more treatments for rare diseases and that this leads to better health for people afflicted by those diseases.

Approval Times for New Drugs
Carpenter and colleagues find that an additional 100 Food and Drug Administration (FDA) staff shortens NDA review times by 3.3 months. The amount of funding for FDA staff is more important than the source of funding in shortening NDA review time.

In This Issue:

The Effect of Formularies on Drug Utilization and Spending
Huskamp and colleagues found that when a health plan moves to a three-tier formulary and increases copayments, some enrollees stop filling prescriptions.

Restricting Drug Access for Medicaid Patients
Soumerai describes the existing literature on Medicaid cost controls, including prior authorization (PA), drug category exclusions, and increased patient charges. He suggests areas of future research and tentative principles for policy makers intent on cutting costs.

Is the US Medical System Better?
Research by Cutler and Mas indicates that the US health system is better at treating conditions for which high-technology medicine is important to better health, but worse at treating conditions requiring substantial chronic disease management.

In This Issue:

Reference Pricing of Pharmaceuticals
Danzon and Ketcham find that reference pricing impairs consumer access to new drugs and does not stimulate competition. The authors forecast that if therapeutic reference pricing were adopted for Medicare, it would do little short run harm, but would do substantial long run harm to incentives for innovation.

The Impact of New Drug Launches on Longevity
Lichtenberg analyzes the impact of new chemical entities on the diseases affecting people in 52 countries. He finds that new chemical entity launches accounted for 0.8 years (40%) of the 1986-2000 increase in longevity.

Pharmaceuticals and the Developing World
Kremer describes pharmaceutical markets in developing countries and prescribes solutions to the government and market failures in those countries. He suggests ways in which the international community can help.

In This Issue:

Productivity in Pharmaceutical-Biotechnology R&D: The Role of Experience and Alliances
Danzon, Nicholson, and Pereira find that products developed in an alliance have a higher probability of success, at least for the more complex phase 2 and phase 3 trials, particularly if the licensee is a large firm.

Demand Effects of Recent Changes in Prescription Drug Promotion
Rosenthal and colleagues find evidence that direct-to-consumer advertising (DTCA) increases therapeutic class sales, but not necessarily market share. DTCA is important, but not the primary driver of recent growth in pharmaceutical sales. The 1997 FDA clarification on regulations governing DTCA does not appear to have affected DTCA spending levels.

Intellectual Property and External Consumption Effects: Generalizations from Pharmaceutical Markets
Philipson and Mechoulan argue that health regulations that fail to simultaneously consider both the external cost problem and the private R&D problem are ill conceived. For example, a policy that aims to save antibiotics for the future may result in fewer antibiotics in the future because of a diminished incentive to innovate.

In This Issue:

The Cost of Drug Development
DiMasi, Hansen, and Grabowski provide an updated estimate of the research and development costs of pharmaceuticals. They find that the average out-of-pocket cost per new drug is $403 million (2000 dollars). Capitalizing out-of-pocket costs at a real discount rate of 11 percent yields a total pre-approval cost estimate of $802 million (2000 dollars).

Health Policy and Technological Change: Evidence from the Vaccine Industry
Government policies designed to make current vaccines available to current patients also induce the pharmaceutical industry to invest more in the development of new vaccines for future patients, according to Finkelstein.

Does Public Science Crowd Out Private Science?
Does Public Scientific Research Complement Industry R&D Investment? No, the evidence examined by Toole indicates otherwise. He finds that government-funded research complements private investment in R&D.

In This Issue:

Patents and Pharmaceutical Innovation
If patents for prescription drugs were eliminated, consumers would gain in the short run from immediate access to generic drugs. However, they would lose in the long run because manufacturers would have less incentive to innovate. For every dollar in short run benefits, consumers would lose three dollars in long run benefits. Consumers would be better off in a system in which patent life was doubled than in a system with no patents according to Hughes et al.

Health Care Innovation and Spending
Investments in medical research have yielded dramatic economic returns. According to Murphy and Topel, "improvements in life expectancy alone added about $2.8 trillion per year (in constant 1992 dollars) to national wealth between 1970 and 1990." They write that it would be worthwhile to invest another $100 billion in medical R&D even if there was only a 20 percent chance of producing a 1 percent reduction in cancer (and an 80 percent chance of producing nothing). Any reforms to medical care should create incentives to innovate more, not less.

Pharmaceutical Innovation and Health
According to Lichtenberg and Virabhak, people who used newer rather than older drugs had an increased likelihood of survival, had an improvement in perceived health status and quality of life, were less likely to experience activity or social limitations, and experienced greater increases (or smaller declines) in physical ability.

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