Regulatory review time and pharmaceutical research and development.

In the United States, all newly developed drugs undergo a lengthy review process conducted by the US Food and Drug Administration (FDA). These regulatory delays have direct immediate costs for drug manufacturers and patients waiting for treatment. Under certain market conditions, regulatory delays may also affect future research and development (R&D) strategies of pharmaceutical companies. To estimate the magnitude of this effect, we match data on drugs in the development pipeline in 2006 to data that we collect on FDA review times for all drugs approved between 1999 and 2005. Employing a rich and novel set of controls that affect drug R&D decisions and, potentially, regulatory review lags, we find that on average, three additional months of delay result in one fewer drug in development in that drug category. Our results suggest that the length of the regulatory delay matters for pharmaceutical firms' R&D decisions and that the firms are likely unable to pass on these costs onto consumers.

The effect of newer drugs on health spending: do they really increase the costs?

We analyze the influence of technological progress on pharmaceuticals on rising health expenditures using US State level panel data. Improvements in medical technology are believed to be partly responsible for rapidly rising health expenditures. Even if the technological progress in medicine improves health outcomes and life quality, it can also increase the expenditure on health care. Our findings suggest that newer drugs increase the spending on prescription drugs since they are usually more expensive than their predecessors. However, they lower the demand for other types of medical services, which causes the total spending to decline. We estimate that a 1-year decrease in the average age of prescribed drugs causes per capita health expenditures to decrease by $45.43. The biggest decline occurs in spending on hospital care due to newer drugs.