Medical Innovation Leads to Long-Term Healthcare Savings

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Posted by Alexander Hendrie on Tuesday, June 21st, 2016, 11:20 AM PERMALINK


The cost of purchasing new medicines is often subject to harsh media coverage, even as the long term health benefits receive far less recognition. While the price of new drugs appears high in isolation, medical innovation leads to substantial savings elsewhere, as noted in a new study released by Frank R. Lichtenberg of the Montreal Economic Institute.

As the study notes, the health benefits have been demonstrated in Canada, America, and the rest of the world using countless health indicators including longevity, overall health, use of other health services, and rate of hospitalization.

For instance, long-term investment developing cancer medicines has resulted in significant savings for the Canadian healthcare system decades after this investment. As the report notes, current savings to the healthcare system totaled almost a billion dollars more than overall spending on new medicines today, close to three decades since the period of medical innovation analyzed. As the report notes:

“If no new drugs had been registered during the 1980-1997 period, there would have been 1.72 million additional cancer patient hospital days in 2012, at a cost of C$4.7 billion in hospital expenditure, whereas total spending on cancer drugs (old and new) in 2012 was an estimated C$3.8 billion.”

This is not unique to the Canadian healthcare system. As the report notes, the correlation between medical innovation and long-term reductions in illness or injury has been proven in the U.S. system:

“Work days lost and school days missed per year because of illness or injury in the U.S. declined more rapidly from 1997 to 2010 for medical conditions with larger increases in the mean number of newer prescription drugs consumed.”

Despite this evidence, presidential candidates on both sides of the aisle have called for price controls in some form or another this election cycle. While the proposals put forward may decrease the costs of drugs in the short term, it would do so in an artificial way that would increase healthcare costs in the long run. Medical innovation would decline because the profits made from medicines in the U.S. are utilized to finance the next generation of life-saving and life-improving prescription medicines. In turn, this results in higher long term healthcare costs due to a lack of cures for a variety of illnesses.

This is more than theoretical, as the Lichtenberg study notes. If the market was suddenly flooded with price-distorted drugs from all around the world, it would cause a decline in medical innovation. As the Lichtenberg study notes, a 10 percent reduction in drug prices through re-importation would cause a 5-6 percent decline in medical innovation in the U.S. using conservative estimates.

Undoubtedly, the costs of new medicines are offset through the savings they cause downstream in the healthcare sector. Before rushing to propose ill thought out price controls, candidates should consider the long-term health benefits that medical innovation causes.  

Photo Credit: 
Karuna EM
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