The Impact of New Drug Launches on Hospitalization for 106 Medical Conditions in 15 OECD Countries, 2002-2015: a Triple-differences Analysis

There are two types of prescription drug cost offsets. The first type of cost offset—from prescription drug use—is primarily about the effect of changes in drug quantity (e.g. due to changes in out-of-pocket drug costs) on other medical costs. Previous studies indicate that the cost offsets from prescription drug use may slightly exceed the cost of the drugs themselves.

The second type of cost offset—the cost offset from prescription drug innovation—is primarily about the effect of prescription drug quality on other medical costs. Two previous studies (of a single disease or a single country) found that pharmaceutical innovation reduced hospitalization, and that the reduction in hospital cost from the use of newer drugs was considerably greater than the innovation-induced increase in pharmaceutical expenditure.

In this study, I reexamine the impact that pharmaceutical innovation has had on hospitalization, using a “triple-differences,” or difference-in-difference-in-differences, research design: I estimate the impact that new drug launches had on hospitalization for 106 medical conditions in 15 OECD countries during the period 2002-2015. This design enables me to control for all determinants of hospitalization growth that are invariant across diseases within a country, and for all determinants that are invariant across countries within a disease. The relative number of new drugs launched for different diseases varies across countries.

Hospitalization is not significantly related to the number of drugs launched 0-3 years earlier; this is not surprising since it takes 8-10 years for a drug to attain its peak level of utilization. However, both the number of hospital discharges and the number of hospital days are significantly inversely related to the number of drugs launched 6-15 years earlier. The estimates indicate that one additional drug launch reduces the number of hospital days 6-15 years later by about 4%. The shapes of the drug-age/drug utilization profiles and of the drug-age/hospital-days-effect profiles are very similar.

The estimated reduction in 2015 hospital expenditure attributable to drugs launched during 1996-2009 is 2.5 times as large as the increase in 2015 drug expenditure attributable to those drugs, which implies that pharmaceutical innovation reduced overall medical expenditure.

Cost offsets from drug innovation appear to be even larger than cost offsets from drug use.