Frank Lichtenberg and the cost of saving lives through pharmaceuticals

Humans are living longer, better lives thanks to innovations in prescription drugs over the past three decades, according to several new studies by Frank Lichtenberg, the Courtney C. Brown Professor of Business.

Every year, according to Lichtenberg’s research, drugs launched since 1982 are adding 150 million life-years to the lifespans of people in 22 countries that he analyzed. He calculated the average pharmaceutical expenditure per life-year saved at $2,837 — a bargain, he says.

“According to most health economists and policymakers, if you could extend someone’s life by a year for less than $3,000, that is highly cost effective,” says Lichtenberg, who gathered new data for these studies to cast a never-before seen view of the econometrics of prescription drugs. “People might be surprised by how cost-effective drugs appear to be in general.”

…To tease out the answer, the professor gathered data on drug launches and the age-standardized premature mortality rate by country, disease, and year. Drawing on data from the World Health Organization, the United Nations, consulting company IQVIA, and French database Theriaque, Lichtenberg was able to identify the role that pharmaceutical innovation played in reducing the number of years of life lost due to 66 diseases in 27 countries. (“Years of life lost” is an estimate of the average years a person would have lived if he or she had not died prematurely.)

Between 1982 and 2015, for example, the US saw the launch of 719 new drugs, the most of any country in the sample; Israel had about half as many launches. By looking at the resultant change in each country between mortality and disease, Lichtenberg calculated that the years of life lost before the age of 85 in 2013 would have been 2.16 times as high if no new drugs had been launched after 1981. For a subset of 22 countries with more full data, the number of life-years gained in 2013 from drugs launched after 1981 was 148.7 million.

Here is more from Stephen Kurczy, and here is previous MR coverage of Lichtenberg and his work.  Given these estimates, do you really think we should be spending less on pharmaceuticals?

Can we spend another $52 trillion without raising middle class taxes?

The question seems like a joke, right?  Yet because so much of our elite media class wants Elizabeth Warren to win, they are contorting themselves into every possible direction to make this one sound coherent.  It is not a question of whether total nominal expenditures on health care go up or down, but rather of thinking through incidence and opportunity cost and where the real burdens of the plan will fall.  Those are the core themes of my Bloomberg column, here is one excerpt:

Another part of the plan is to pay lower prices — 70% lower — for branded prescription drugs. That is supposed to save about $1.7 trillion, but again focus on which opportunities are lost. Lower drug prices will mean fewer new drugs are developed. There is good evidence that pharmaceuticals are among the most cost-effective ways of saving human lives, so the resulting higher mortality and illness might be especially severe.

And the close:

Warren’s proposals, when all is said and done, are best viewed not as a way of paying for her program but as a series of admissions about just how expensive it would be. Whether or not you call those taxes, they are very real burdens — and many of them will end up falling on the middle class.

By the way, here is a good NYT summary of Warren’s financing plan.  Here is a good Maxim Jacobs tweet:

It’s really hard to pick out which part of her plan is most insane?: – Lowering brand drug pricing by 70%? – CMS paying specialists less money – Taxing unrealized capital gains – Claim hiring more IRS agents will raise $2.3 trillion – “Not one penny in middle-class tax increases”

Here is more from Peter Suderman.

Are pharmaceutical drug prices too high?

Hillary Clinton has proposed a new plan to bring down prescription drug prices, but so far the reception is cool.  Here is one comment:

But when I ran it by some health economists and other health policy experts, several strongly disliked the idea because it misunderstands the diversity of companies in the pharmaceutical industry. They say it would create perverse incentives that could raise instead of lower the costs of developing new drugs.

“This is an astonishingly naïve approach,” said Amitabh Chandra, a professor of public policy at Harvard University, in an email. He argues that the plan could encourage wasteful research spending without necessarily doing much about the prices charged for medications.

That is from Margot Sanger-Katz at the NYT, not the Heritage Foundation.

I would stress a different point, and this concerns pharmaceutical prices more generally, not just the Clinton plan.  Higher prices induce more innovation, and those innovations benefit patients in many countries.  Note that connection is true even if you think most innovations come from universities or the NIH rather than being hatched Big Pharma.  There is still a pot at the end of the rainbow for the significant innovators in this process.

OK, so how much does innovation go down if prices go down?

Here is an earlier post by Alex on Frank Lichtenberg’s estimation: “Thus, price controls or other restrictions that reduce prices are almost certainly a bad idea.”

Here is another earlier post by Alex, citing Megan, noting that Apple spends three cents of every dollar on R&D, and other inconvenient facts and that was from 2009.

If the advocate of lower drug prices does not have clear quantitative evidence for a conclusion of “lowering drug prices will not harm innovation very much,” commit the analysis to the flames, for it harbors nothing but sophistry and illusion.  And while agnosticism about elasticities might weaken the argument for keeping prices high, that’s not an argument for lowering prices, that is an argument for agnosticism.

This same point applies to most commentaries on TPP I might add, and intellectual property analysis.  Write it on the bathroom wall: “Without an elasticity, there is no answer.”  And scream it from the rooftops while you are at it.

*Bad Pharma*, by Ben Goldacre

Here is a simple sentence from Frank Lichtenberg, an economist who studies pharmaceuticals and a highly reputable researcher in the area:

This implies that the incremental cost-effectiveness ratio (cost per life-year gained) of pharmaceutical innovation was about $12,900.

Read the whole paper, and if you wish to go further, you can peruse his entire body of work.

I am thus a little nervous when Ben Goldacre entitles his recent book Bad Pharma: How Drug Companies Mislead Doctors and Harm Patients.  (I have a UK copy, and it is due out in the U.S. this February.)  I do in fact agree with Goldacre’s portrait of a sector wracked with massive corruption and shoddy scientific standards.  And I see many aspects of this book as deserving an “A” or “A+” rating, which I would not hand out lightly.  But I won’t continue down that track, because I suspect the book will receive many very positive reviews, as indeed it did in the UK.

Could he not have called the book Not Nearly as Good as it Could be Pharma: How Corruption is Diminishing One of Our Great Benefactors?  Admittedly that does not roll off the tongue as nicely.

Or how about Slow Pharma: How to Get the New Drug Pipeline Up and Running Again?

Goldacre’s policy recommendations would in general raise the costs of research and development, although they would  likely improve the accuracy of research results and reduce over-prescription and overuse of drugs.  It is quite possible they would lower the rate of return to pharmaceutical innovation, likely I would say.  These trade-offs are neglected, and, much as I admire many features of this book, I cannot help but, alas with trepidation, call some of its central features “Bad Science.”  Bad Economic Science.  The morality of the narrative and the Platonism of his vision distracts him from presenting the policy trade-offs clearly.

Lichtenberg’s name does not appear in Goldacre’s index.  Nor does the word “innovation.”

Recommended, with or without prescription, but use with extreme caution.  And you should “compound” this with other books.

Addendum: I bought this book myself, which included Amazon shipping charges from the UK, and was not sent a free sample or visited by an attractive sales representative.

Second Addendum: There is some back and forth between Goldacre and me in the comments section.

Pharmaceutical innovation is very, very good

From Frank Lichtenberg:

We examine the impact of pharmaceutical innovation, as measured by the vintage of prescription drugs used, on longevity, using longitudinal, country-level data on 30 developing and high-income countries during the period 2000-2009. We control for fixed country and year effects, real per capita income, the unemployment rate, mean years of schooling, the urbanization rate, real per capita health expenditure (public and private), the DPT immunization rate, HIV prevalence and tuberculosis incidence. Life expectancy at all ages and survival rates above age 25 increased faster in countries with larger increases in drug vintage. The increase in drug vintage was the only variable that was significantly related to all of these measures of longevity growth. Controlling for all of the other potential determinants of longevity did not reduce the vintage coefficient by more than 20%. Pharmaceutical innovation is estimated to have accounted for almost three-fourths of the 1.74-year increase in life expectancy at birth in the 30 countries in our sample between 2000 and 2009, and for about one third of the 9.1-year difference in life expectancy at birth in 2009 between the top 5 countries (ranked by drug vintage in 2009) and the bottom 5 countries (ranked by the same criterion).

Makena and the Orphan Drug Act

Makena is a drug used for premature birth therapy. It’s been available off-label for a long-time but KV pharmaceuticals ran a clinical trial and applied for FDA approval under the Orphan Drug Act (ODA). Under the ODA, KV is entitled to seven years of market exclusivity, this is even stronger than a patent because it gives KV the right to exclude from the market any drugs (not just similar drugs) that treat the same condition.

Now that KV has a monopoly—enforced against compounding pharmacies by threats from the FDA—the price will rise from about $10 to a listed price of $1,500. Naturally a lot of people are outraged.

In The Blessed Monopolies (pdf) I  explained how the ODA and similar rules such as pediatric exclusivity can be gamed by pharmaceutical firms for big profits. The early AIDS drug AZT managed to get market exclusivity under the ODA, for example, because it appeared when the patient population was below 200,000, thus meeting ODA requirements, even though everyone knew the patient population was expanding rapidly.

Once a drug is off-patent, however, there is very little incentive to study it further or to run the clinical trials necessary to get FDA approval. Although the drug has been used off-label for some time (another example of the importance of off-label prescribing) a decent clinical trial still has considerable value. The problem is that as with patents there is very little connection between the effort required to get exclusivity under the ODA and the potential profits (see my paper Patent Theory v. Patent Law).

Despite my skepticism of the ODA, however, I was convinced by Lichtenberg and Waldfogel’s Does Misery Love Company that the ODA as a whole has done some good. Lichtenberg and Waldfogel find that after the ODA was passed (but not before) mortality rates for people with orphan diseases decreased faster than mortality rates for those with more common diseases. The decrease in mortality was consistent with the introduction of more new drugs for orphan diseases.

The important point is that like patents the ODA should be evaluated as a rule and not on a case-by-case basis. I am all for patent reform and FDA/ODA reform but this is truly a case where we don’t want to throw the baby out with the bathwater.

Hat tip: Eddie W.

Addendum: See also Derek Lowe who, as usual, offers intelligent comments.

Columbia Business School has a blog

Here, and you’ll find economists Glenn Hubbard, Frank Lichtenberg, and "CBS Blogger."  Here is one post "Blogging Means Business."  Columbia Business School has many great economists, let’s see if they are good enough to solve the free-rider problem with most (not all) group blogs.

Elsewhere from the world of business, here are search engine futures, thanks to Michael Foroobar for the pointer.

Medicare Loops

"Medicare for Everybody" is becoming a slogan in the left-wing blogosphere.  Does it sound so bad?  Surely private insurance deserves a whacking for its high overhead costs and its general willingness to not cover people, screw people over, and deny just claims. 

But also recall it was only a few years ago that the federal government expanded Medicare coverage to prescription drugs.  Private insurance has been covering prescription drugs for — what — about twenty-five years?

I do not need to repeat to loyal MR readers that prescription drugs are about the most useful and most life-saving of all forms of treatment.  Loyal readers also will know that greater Medicare access, as measured by more doctor visits, doesn’t seem to improve health care outcomes.  But drugs do.

So when it comes to the one thing that really works, government insurance was twenty or more years behind private insurance.

In case you didn’t already know.

Are you familiar with the early musical works of Steve Reich, you know the taped loop recordings, like "It’s Gonna Rain"?  A phrase is repeated over and over again.

The next time you hear "Medicare for Everybody" I want you to also hear:

"So when it comes to the one thing that really works, government
insurance was twenty or more years behind private insurance."

"So when it comes to the one thing that really works, government
insurance was twenty or more years behind private insurance."

"So when it comes to the one thing that really works, government
insurance was twenty or more years behind private insurance."


I thank a loyal MR reader for making this point to me.

Oh, had I mentioned that the 21st century is supposed to be the century of the biomedical sciences?

Price Controls on Pharmaceuticals

Frank Lichtenberg uses a novel strategy to estimate the effect of price controls on innovation.  Simplifying (see the paper for details) Lichtenberg argues that the profit from a pharmaceutical is essentially P*Q-FC where P is price, Q is quantity and FC is fixed cost.  Most of the fixed cost is due to research and development and getting through FDA hurdles.

The key to Lichtenberg’s strategy is to note that changes in Q have the same effect on profit and thus on the incentive to innovate as changes in P (this is not really true since changes in P also influence Q but Lichtenberg adjusts for the elasticity of demand).  Moreover we can estimate the effect of changes in Q on innovation by looking at how the incidence of a disease influences innovation.  Lichtenberg finds, for example, that pharmaceutical innovation is higher among cancers with greater incidence (e.g. lung versus pancreatic cancer).  Using the Q to innovation relationship he estimates that a 10% reduction in price would reduce pharmaceutical innovation by 5%.

We know that pharmaceutical innovation saves lives and has a very high benefit to cost ratio.  Thus, price controls or other restrictions that reduce prices are almost certainly a bad idea.

Indeed, as I have argued before, health care spending on the margin has very low value.  We know, for example, that Medicare regions that spend twice as much on patients have no better outcomes.  Spending on health care research and development, however, has very high value.  Thus price controls would be a disaster – reducing high value R&D and replacing it with low value current spending.

I fear that short-term thinking by politicians and the public will destroy the US pharmaceutical industry. 

Me-Too Three

Today I tie up some loose ends (here is post 1 and post 2 in the series) beginning with an argument in favor of me-too drugs that I do not like and then moving on to an attack on Marcia Angell’s book The Truth About Drug Companies.

Many people argue that price competition is a benefit of me-too drugs.  But recall the point I made yesterday, me-too policy is patent policy.  If you think lower prices are a good idea then you really think that weaker patents are a good idea.  Indeed, as far as price competition is concerned the ultimate me-too drug is a generic so the logic suggests we should get rid of patents.  For obvious reasons, that is not a good idea.  (Our current policy is actually quite good – strong patents for about 12-15 years of effective life followed by very sharp price competition from generics.   Note that since profits are discounted the future competition doesn’t reduce R&D very much.)

I dislike Marcia Angell’s The Truth About Drug Companies not because of her conclusions but because it isn’t serious research.  She has lots of citations to newspapers, for example, but not a single citation to Frank Lichtenberg the premier researcher on the value of new drugs.  (I don’t agree with everything in Jerry Avorn’s Powerful Medicines, and he doesn’t cite Lichtenberg either, but I learned something from his book.  If you are interested in these issues I recommend it highly.)

Concerning me-too drugs, on page 90 Angell says "there is little evidence to support the notion that…if one drug causes side effects, another one won’t."  That’s odd because on page 81 when discussing the me-too statin’s (Zocor, Lipitor, Pravachol etc.) she notes "Bayer’s Baycol had to be removed from the market because, at the approved dose, it caused a deadly side effect."  Hmmm.  Similarly, early tests suggest that Celebrex may not have the same side-effects as Vioxx, despite the fact that both are Cox-2 inhibitors.

Angell is also skeptical that me-too drugs can have different effects in different people.  Frankly, I was shocked at this argument. Every clinical trial that has ever been run demonstrates that the same drugs have different effects in different people – it’s hardly a surprise that different drugs have different effects.  And me-toos are different – different enough not to violate the patent on the innovator drug almost certainly means different enough to have different effects in some people.  My local supermarket carries at least a dozen different styles of peanut butter, a fact of which I approve, but Angell thinks two angiotensin-converting-enzyme (ACE) inhibitors may be one too many (p.90).  Give me a break. 

Finally, it’s important to recognize that small changes can actually make for important improvements.  What could be more me-too than a once-a-day pill replacing a twice-a-day pill?  Yet, to dismiss this change is to overlook the people factor.  A once-a-day regime that people stick to is much better than a twice-a-day regime that people fail to follow.  Forget the chemical structure the economics says a drug that people actually take is a better drug.