This paper reviews the evidence covering the impact of biopharmaceuticals on the level and growth of total health care costs. The primary source of spending in health care is on labor, such as doctors, nurses or assistants, which makes up over 70% of overall spending, similar to other US industries. Nevertheless, many lawmakers often stress that capital spending on medical products such as drugs, diagnostics, and devices is the cause of the level and growth in overall health care spending. We find that during the last 20 years, profits and sales by research-based pharmaceutical companies made up 1.0% and 7.5% of total health care spending, respectively. In addition, annual sales growth contributed -4.5% to the annual growth in total health care spending, partly due to real declines in drug spending in some years when there were increases in real health care spending. We thereafter summarize the evidence base on the impact of biopharmaceutical innovation on overall health care spending, which has been addressed by a large literature on so called cost offsets of new drugs. We find that these studies report an average cost offset from medical innovation, or total cost decrease, of $151.94 per new drug. We estimate how much recently proposed US price controls on drugs in the US would raise health care spending and find that total health care spending would increase by $50.8 billion over a 20-year period.

To read the full paper click here.

Scroll to Top