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Executive Summary

Reducing the Health Care and Societal Costs of Disease: The Role of Pharmaceuticals

by Greg Hermus, Carole Stonebridge, Thy Dinh, Selma Didic and Louis Thériault

Canada’s public health care system is under financial strain, with health care costs consuming over 40 per cent of all provincial government spending. Advances in medical technology, including pharmaceutical innovation, have been identified as a significant source of rising health care spending in many developed countries. Faced with aging populations, slower long-term annual economic growth, and the need to balance budget deficits, many developed countries around the world are looking at ways to address rising drug spending. Yet empirical evidence suggests that introducing new drugs can in fact offset, and even lower, overall health care spending.

Pharmaceutical innovation can also boost the output of an economy by reducing productivity losses due to disease and sickness. And it can enhance a country’s economic prospects and employment opportunities as a direct result of pharmaceutical development and production. Pharmaceutical development and production can encourage the training of the next wave of innovators and result in the development of deeper and more integrated life science clusters.

This report quantifies the health care and societal benefits of pharmaceutical innovation. The approach used in this report is different from most other standard pharmacoeconomic analyses that do not express both costs and benefits in monetary terms. Instead, the cost-benefit approach in this report provides an accounting framework in which the evidence can be used for fiscal planning purposes. It also illustrates the system-wide effect pharmaceutical treatment can have on the economy—a useful feature for informing reforms aimed at sustaining the health care system. The report does not examine the economic impact of pharmaceutical innovation from a production-related perspective.

This report captures the direct impact on health care costs, which include physicians, hospitals, drugs, and other spending related to health care. And the report also considers the impact on other societal costs, including costs related to short- or long-term disability, to early mortality, and to reductions in on-the-job productivity that are specifically related to diseases.

Over the past five years, the aggregate health and societal benefits outweighed the additional costs of treatment (compared with usual care or a placebo) for the classes of drugs examined for this report: ACE inhibitors, statins, biguanides, biological response modifiers, inhaled steroids, and prescription non-nicotine smoking cessation aids. (See Table 1.) These medications are currently used to treat four of the most common chronic disease conditions in Ontario: cerebrovascular disease, ischemic heart disease, asthma, and rheumatoid arthritis. They are also used to control and prevent health-related complications arising from four major risk factors for developing cardiovascular disease (both cerebrovascular disease and ischemic heart disease): high blood pressure, high cholesterol, diabetes, and smoking.

Total Spending and Offsetting Health and Societal Benefits of Six Classes of Drugs in Ontario table

Health and Societal Benefit-Cost Ratio of Pharmaceutical Treatments, 2012 chartOn a treatment-by-treatment basis, the combined health and societal benefits outweighed the additional cost of treatment innovation for four of the six classes of drugs examined—those used to treat diabetes, high blood pressure, high cholesterol, and asthma. (See Chart 1.)

Over the longer term, from 2013 to 2030, all six classes of drugs examined can expect to produce combined health and societal benefits that outweigh the costs associated with treatment. This includes biologic response modifiers, a relatively new and costly way to treat rheumatoid arthritis, and prescribed non-nicotine smoking cessation aids. Chart 2 shows that all the ratios projected for 2030 are higher than the comparable estimates for 2012.

Health and Societal Benefit-Cost Ratio of Pharmaceutical Treatments, 2030 chart

This report examines two additional scenarios related to pharmaceutical treatment over 2013–30. The first scenario shows that improving patient compliance with prescribed pharmaceutical treatments would produce health and societal benefits that exceed those in the base-case scenario. The second scenario shows that new pharmaceutical innovation that offers higher clinical efficacy (but at a higher cost) would also boost health and societal benefits. While the efficacy and costs of the new pharmaceutical treatments incorporated in the scenario are hypothetical, the analysis confirms that a long-term perspective is necessary to objectively assess the costs and the associated benefits throughout the pharmaceutical product life cycle. This also suggests that investments made to facilitate pharmaceutical innovation need to be viewed over the long term, as the return on investment increases with time.

All three scenarios provide a perspective on the degree to which benefits and costs associated with pharmaceutical treatments are influenced not only by the type of treatment but also by the treatment’s efficacy, compliance, market penetration, and price. The projections suggest that policy-makers should consider the offsetting impact that pharmaceutical innovation can have on other health care costs and productivity enhancement.

Gregory Hermus Gregory Hermus
Associate Director
Canadian Tourism Research Institute
Carole Stonebridge
Carole Stonebridge
Senior Research Associate
Health Programs
Thy Dinh
Thy Dinh
Senior Research Associate
Selma Didic Selma Didic
Louis Thériault Louis Thériault
Health Economics

Read the Full Report

The Role of Pharmaceuticals report coverThis report uses the experience of Ontario to better understand the impact of pharmaceutical innovation on health care costs and on other costs of disease borne by society such as productivity losses due to disease.