FDA Drug Classifications and Health Care Expenditures

Abstract

This paper contributes to the growing literature regarding the impact of priority drugs on medical costs. There is a conflict among researchers about the benefits and costs of newer and better drugs. Lichtenberg (2001, 2002) find out that newer drugs cost more, but their use reduces nondrug expenditures by more than the increase in drug costs. Duggan (2005) finds in contrast that newer antipsychotics do not result in substantial cost savings. In this study, we offered a better methodology by incorporating both the quality and the age of the drugs to capture their effects on total health care expenditures. We analyzed the impacts of the quality and the age of the drugs on the following therapeutic classes: Diseases of the Musculoskeletal System and Connective Tissue, Diseases of the Skin and Subcutaneous Tissue, Neoplasm, Mental Disorders, Diseases of the Nervous System and Sense Organs, Diseases of the Circulatory System, Diseases of the Respiratory System, Diseases of the Digestive System and Diseases of the Genitourinary System. Our results suggest that newer priority drugs significantly reduce total health care expenditures for Diseases of the Musculoskeletal System and Connective Tissue, Skin and Subcutaneous Tissue, Circulatory System and Respiratory System. Newer standard drugs, however, provide cost savings for Neoplasm, Diseases of Digestive and Genitourinary systems. Both newer priority and standard drugs do not provide any cost savings for Mental Disorders and Diseases of the Nervous System and Sense Organs.