Big Benefits from Big Pharma: Longevity and Real Welfare Growth

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The pharmaceutical industry certainly doesn’t suffer from a lack of detractors. Many claim that “Big-Pharma” is simply in it for the money, and that they’ll push new drugs simply to boost profits, even if the drugs aren’t appropriate for the consumer.  Others argue that we should eliminate intellectual property protections to get lower price drugs, since there isn’t really that much innovation that has a real impact happening anyway.

However, before throwing the pharmaceutical industry under the bus, it is critical to understand the relationship between pharmaceutical R&D, new drugs and human health impacts.  And in fact, a recent study finds that the related drugs brought to market are having a bigger positive effect than you might think. Frank Lichtentberg, a professor at Columbia University and published by the National Bureau of Economic Research,  finds that an increase in drug proliferation year-over-year (drug vintage) leads to increased life expectancy.  From 2000 to 2009, the study finds that life expectancy increased by 1.74 years on average, and 73% of that increase was due to new drugs brought to market after 1990. In other words, pharmaceutical innovation added 1.23 years to the average lifespan. The author also finds that of the 9-year difference in average life expectancy between the top-5 nations and the bottom 5, more than a third of the difference is directly attributable to drug proliferation.

Specifically, the study looks at how differences in drug introductions in 1990 affect longevity in 2000.  Their study looks at the effect both among and between 30 developed and developing nations.  They use a causal model (difference-in-differences) to eliminate biased estimates.  Their results are statistically significant, and stand up to a myriad of different specifications and tests of the validity of their claims.  The increases in longevity are not attributable to other trends including: income, unemployment, education, urbanization, per-capita health expenditures, DPT immunization, general risk factors of HIV or tuberculosis.

So, what is the key point in relating these increases in life-expectancy to pharmaceutical innovation?  One might argue that simply keeping people alive who aren’t contributing to the economy is a negative thing.  However, this argument is fallacious.  Between 1970 and 2000, increased U.S. longevity added about $3.2 trillion per year to national wealth.  For example, Murhphy and Topel find that if there were a 1 percent reduction in cancer mortality, it would be worth over $500 billion in the United States.  In fact, if a cure to cancer were discovered and brought to market, the economic benefit would be potentially worth $50 trillion over the next 30 years. Murphy and Topel rightly claim; “As the population grows, as incomes grow, as health levels improve, and as the baby-boom generation approaches the primary ages of disease-related death, the social value [in $US] of improvements in health will continue to rise.”

So, what are the policy implications?  It has been shown that the effective patent life of most FDA-approved drugs is between 9 and 12 years.  (Most pharma-patents are applied for during the pre-clinical period, and even after accounting for partial patent-restoration, the full 20 years of patent protection is not realized.)  This makes recapturing the over $400 million of out-of-pocket costs associated with the average FDA-approved drug a difficult task indeed. (One that has most likely lead to the recent flurry of off-label promotion.)  Moreover, rampant policies in other nations to not pay the full costs of drugs (e.g., through requiring drugs to be sold at discounts) also reduces the revenues that can go back into R&D and innovation.

Increasing the effective patent life of R&D intensive industries may be the incentive needed to boost innovation we are looking for, and with it real benefits to social welfare.  As Grabowski, an economist at Duke University argues, “Without a well structured system of patent protection, neither the research pharmaceutical industry nor the generic industry would be able to grow and prosper, as the rate of new product introductions and patent expirations would decline significantly.” Overall, increasing pharmaceutical R&D has positive spillovers.  It increases economic productivity and of course individual health and wellbeing.  By increasing the returns to life sciences innovation, firms would be increasingly willing to take on the substantial out-of-pocket costs associated with bringing new drugs to market, with real implications for life-expectancy, and real-wealth.

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About the author

Justin Hicks joined ITIF in June of 2012 as Senior Economic Policy Analyst. Prior to joining the ITIF as Senior Economic Policy Analyst, Justin Hicks finished his Ph.D. in Economics at the University of California, Merced. His research focused on potential spillovers of cooperative R&D in the international setting as well as the impact of funding on R&D productivity in universities. In his current research, he looks to identify the effect of trade policy on the flow of ideas and home-country R&D productivity. His primary expertise lies in using applied microeconometrics to identify causal relationships using large data-sets. Prior to receiving his Ph.D., Justin achieved a M.A. in economics and a B.A. in Business economics from the University of California, Riverside.