Pharmaceutical Cost Offsets

Does increasing use of prescription drugs decrease cost?  There is evidence on both sides of the aisle.  However, a recnet paper by Deb, Trevedi and Zimmer (2014) does find evidence of cost offsets using a sophisticated copula-based bivariated dynamic hurdle model.  This model, models drug and non-drugs spending and for each dimensions models the probability of $0 spending using a probit and then models log spending levels conditional on positive spending using a gamma distribution.  Using Medical Expenditure Panel Survey data, the authors find:

There is evidence of greater than dollar-for-dollar cost-offsets of expenditures on prescribed drugs for relatively low levels of spending on drugs and less than dollar-for-dollar cost-offsets at higher levels of drug expenditures.

This is a perfectly sensible conclusion. Effective drugs do reduce medical spending. Likely, cost-offset are smaller when a drug is branded.  For instance, consider an effective drug that reduces hospitalization costs by $10,000 but costs $12,000. This is a less than dollar-for-dollar offset. Now assume that after a few years the drug becomes generic and costs only $500. In this case, the reduction in hospilization cost is still $10,000 so there is a more than dollar for dollar offset. Some people may interpret this finding as that generic drugs are more cost effective than branded drugs. While this may be drug in some static sense, without the higher prices for brands, innovative new drugs would not come to market. It would be interesting to see whether over the life of a drug (say 20-30 years) are the cost offsets more or less than dollar for dollar when taking into account both the time the drug spent on and off patent.

Regardless, the Deb paper clearly shows that many drugs do produce cost offsets.


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