The Effect of Newer Drugs on Health Spending: Do They Really Increase the Costs?

We analyze the influence of technological progress on pharmaceuticals on rising health expenditures using US State level panel data. Improvements in medical technology are believed to be partly responsible for rapidly rising health expenditures. Even if the technological progress in medicine improves health outcomes and life quality, it can also increase the expenditure on health care. Our findings suggest that newer drugs increase the spending on prescription drugs since they are usually more expensive than their predecessors. However, they lower the demand for other types of medical services, which causes the total spending to decline. We estimate that a 1-year decrease in the average age of prescribed drugs causes per capita health expenditures to decrease by $45.43. The biggest decline occurs in spending on hospital care due to newer drugs.