The Economic Impact of Medicines

Teeling Smith, G.

September 1990

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The objective of medical care is to improve people's health. This includes avoiding illness whenever possible, alleviating suffering and disability when illness does occur, and prolonging life, particularly through the prevention of premature deaths.

In a Utopian situation, it might be possible to devote unlimited resources to these objectives. However, in the real world, resources for health care will always be limited, no matter how it is organised or financed. Difficult choices will therefore have to be made between competing demands for the same scarce funds and manpower. Thus, it is increasingly recognised that the discipline of economics has a major role to play in planning and organising health services.

Economists cannot, however, make the final judgement about how resources should be allocated. Such decisions will involve value judgements about relative priorities as well as technical considerations and are the proper domain of politicians, health service managers and representatives of patients themselves. But economists can offer analysis of the relative costs and benefits of alternative choices in order to assist decision makers. In this connection, new techniques for measuring patients' quality of life have been devised, and these are starting to supplement the traditional measures of mortality and morbidity. On the cost side, a growing body of research literature has highlighted how new treatments may improve cost effectiveness, how they save costs in other sectors of the health service, and how much the patients' recovery may add to the economic wealth of the nation.

Without ever forgetting that the objective of the health service is to improve wellbeing, it is important also to look at the financial savings which new treatments may yield.

Potential savings to the health service itself are obviously of particular importance to health service managers and to doctors who may be facing cash-limited budgets. A number of examples of such savings were given in OHE Briefing No 25 and this present Briefing adds to those with further examples from a number of countries. In particular, it draws attention to cases where an expensive medicine may more than pay for itself by reducing other health care costs.

Sometimes later generations of medicines are more expensive than those they replace but they generate savings in the overall costs of treatment that more than cover their additional direct costs. Such medicines release health service resources to provide otherwise unaffordable treatments. Thus they represent real savings to the health service even though they do not directly reduce total expenditure. In other words, these examples of savings in health service costs through the use of modern medicines increase the total amount of treatment which is available from a given budget, rather than resulting in a reduction in the total annual cost of the health service. Without such savings the improvements in health which are actually achieved would have cost much more. In that way, the savings to be discussed in this paper contribute directly to increasing the welfare of patients within the limits set by the available resources.