The Economic Benefits of Life Science Innovation

The Economic Benefits of Life Science Innovation

We often hear from advocates of weak intellectual property regimes for medicines that they are needed to increase access. Weakening incentives to innovate, however, will have serious repercussions on our future health and economic outcomes. A recent study on Sweden provides a unique opportunity to see what the world would look like if pharmaceutical and biotech innovation had suddenly stopped for 13 years, which is what is likely if IP protections were taken away.

The recent study by Lichtenburg and Pettersson attempted to measure the impact of new drugs on life expectancy in Sweden. Aggregate level data was collected on drugs released since 1997 and changes in mortality rates for various diseases. Using differences-in-differences methodology, the authors calculate an estimate of what health results in the country would look like if doctors and hospitals were constrained to only using medicines and technology created before 1997.

Between 1997 and 2010, the average age of death in Sweden rose by 1.88 years. The authors estimate that pharmaceutical innovation is responsible for 5.6 months of this increase. Moreover, the study estimates that if no new drugs had been commercialized from 1992 to 2001, Swedes would have spent 12 percent more time in hospitals. The savings from decreased hospitalization almost cancels out the higher cost of pharmaceuticals, with an estimated net cost increase of just $233 per life-year. More simply, as a direct result of 13 years of healthcare innovation, the average Swede will live almost 6 months longer and will pay just $109 to do it.

These life-saving drugs don’t just improve health. The economic impact of this new innovative technology is substantial. Increased life expectancy fuels GDP growth (though perhaps not on a per capita basis). Based on fewer early deaths and more births, a one percent increase in life expectancy is estimated to result in a 1.5% increase in population size. While the labor force participation rate will drop as the percentage of retirees goes up, the overall labor force will swell as seniors retire later and as fewer people die before retirement age. The larger workforce is also characterized by higher human capital, as a longer expected career leads to the average worker having more years of experience. In addition, workers expecting longer careers have greater incentive to invest in their own education. Mortality before workers retire costs society money in wasted human capital that has been accumulated (at a cost to society) and not fully used.  Finally, reductions in hospitalization will keep workers healthy and productively on the job.

Increases in available technology will also make workers more efficient and expand Sweden’s potential production frontier (PPF). These gains need not be constrained to medicine. Spillover effects from the new technology can positively affect all sectors of the economy. There is no reason to believe that data from other nations, particularly developed nations, would point to a conclusion significantly different from Sweden’s.

The United States derives additional benefit from innovations in the pharmaceutical and biotechnology sectors because of its competitive advantage globally in life sciences. R&D labs, both public and private, create high wage jobs and exports of life sciences create enormous economic gains. In the period studied, over 50% of medical patents originated in the United States, and 18 out of the last 30 Nobel prizes in medicine have been awarded to Americans (though our dominance is slipping). Spillover effects between labs are maximized by concentrated, high-tech clusters, with leading pharmaceutical and biotechnology companies locating near universities where the most innovative research in the world is taking place. It is the very research that has improved the lives of those in the United States, in Sweden, and across the globe.

We should remember studies like this one when advocates push for weakened intellectual property policy prescriptions. While they can be a quick fix for cheap drugs, they will not ensure the continued improvements that will benefit both our economy and our personal health outcomes. Comparing the price of patented drugs with the benefits from health innovation, protecting innovators with strong intellectual property rights is in everybody’s interest.