Background: Pharmaceutical firms spend billions of dollars developing new therapies, which are often sold at a substantial premium over older therapies. The costs and benefits of these newer and more expensive drugs, however, are controversial. The empirical evidence on whether newer drugs can decrease overall healthcare expenditures may enable private and public health policymakers to develop new drug benefit structures.Objective: This paper investigates the impact of new drugs and drug classes on overall healthcare expenditures. The paper focuses on the level of reductions in total healthcare expenditures drawn from the replacement of other drugs with breakthrough drug classes.Methods: We used the Medical Expenditure Panel Survey (MEPS) data sets from 1996 to 2001. To measure the effect of important drugs prescribed for a given condition on the expenditures, we developed a model that captures the effect of important drugs on expenditures in a less restrictive way than the extant literature. Our analysis of these drug groupings offers several improvements over prior work. First, we treated all drugs with a similar pharmacology as the same, rather than assigning their therapeutic value based on year of introduction. Second, our approach recognizes that innovations emerge in waves and that drugs within a particular group are more similar therapeutically to each other than to other existing drugs, or other drugs introduced in the same or different years. Third, we separately estimated the effects of each of these groups of drugs on drug and non-drug expenditures. Finally, we measured the cost impact of drug use in a more general way than in the existing literature. We examined six different groups of breakthrough drugs, selective serotonin reuptake inhibitors, statins, angiotensin-converting-enzyme (ACE) inhibitors, histamine type 2 antagonists, proton pump inhibitors, calcium channel blockers and fluoroquinolones.Results: Our results demonstrate that drugs from breakthrough classes - except ACE inhibitors - are more expensive than other drugs. Next, we measured the impact of breakthrough drug classes and other drugs on total non-drug medical expenditures. The results indicate that important drugs significantly decrease total non-drug expenditures for all breakthrough classes, except fluoroquinolones. In general, the reduction in non-drug expenditures is many times larger than the increased drug expenditures.Conclusion: Breakthrough drug classes, with the exception of fluoroquinolones, substantially reduce overall healthcare expenditures.
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