The Impact of New Drugs on US Longevity and Medical Expenditure, 1990–2003: Evidence from Longitudinal, Disease-Level Data

Abstract

A number of econometric studies (Charles R. Hulten 1992; Byong-Hong Bahk and Michael Gort 1993; Plutarchos Sakellaris and Daniel J. Wilson 2004) have investigated the hypothesis that capital equipment employed by US manufacturing firms embodies technological change, i.e., that each successive vintage of investment is more productive than the last. Equipment is expected to embody significant technical progress due to the relatively high research and development (R&D) intensity of equipment manufacturers. The method that has been used to test the equipment-embodied technical change hypothesis is to estimate manufacturing production functions, including (mean) vintage of equipment as well as quantities of capital and labor. These studies have concluded that technical progress embodied in equipment is a major source of manufacturing productivity growth. Embodied technical progress may also be an important source of economic growth in healthcare. One important input in the production of health—pharmaceuticals—is even more R&D intensive than equipment. According to the National Science Foundation (NSF), the R&D intensity of drugs and medicine manufacturing is 74 percent higher than the R&D intensity of machinery and equipment manufacturing. Therefore, it is quite plausible that there is also a high rate of pharmaceutical-embodied technical progress. This study examines the effect of changes in the vintage distribution of prescription drugs on US longevity and medical expenditure during the 1990–2003 period. We will estimate the following model, using longitudinal disease-level data: