Do newer prescription drugs pay for themselves? Searching for appropriate empirical methodologies

Newer and more expensive drugs account for a large proportion of the recent rapid growth of prescription drug spending. However, if use of newer drugs can reduce spending on other medical services, it may save total healthcare costs (the "cost-saving effect"). Aggregate-level evidence of the cost-saving effect is supported by two well-cited studies conducted by Frank Lichtenberg. He argued that in the aggregate, using new drugs reduces total healthcare costs. In Paper 1, I reassess this evidence and conclude the original findings are not maintained under plausible alternative approaches. Thus, we do not have robust evidence of the aggregate cost-saving effect.; Furthermore, wide variations in safety, efficacy and costs exist across drugs and diseases. In Paper 2, I investigate the cost-saving effect in one clinical area---atypical antipsychotic agents compared with traditional mood stabilizers as long-term treatment for bipolar disorder. Using commercial insurance claims data from 1998-2001, I test the hypothesis through several econometric methods, including a propensity-score matching, interrupted time series, differencing strategies, and an instrumental variables approach. Each method can identify the cost-saving effect in a different way, but together they can serve as checks for robustness. I consistently find that the new medication does not reduce non-drug medical spending for patients with bipolar disorder.; Nevertheless, the cost-saving effect is plausible both theoretically and empirically. Cost-saving evidence is often shared across jurisdictions and used to guide decisions regarding the adoption and reimbursement of new drugs. However, variations in healthcare rationing policies may complicate the generalizability of such cost-saving evidence. In Paper 3, I propose an economic approach to generalizability of evidence on cost-saving effects for new prescription drugs across health systems with different rationing schemes. I note that the cost-saving effect depends on a new drug's effect on the relative prices of drug and non-drug medical inputs to health outcomes, as well as the substitutability between the two inputs. I also show that quantity constraints on non-drug treatments mainly decrease the cost-saving effect; and for some special cases, overall budgetary rationing reduces the cost-saving effect as well. This paper therefore demonstrates the importance of considering rationing schemes when applying cost-saving evidence across countries.