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Source: Lichtenberg, Frank. “The impact of biopharmaceutical innovation on disability, Social Security recipiency, and use of medical care of U.S. community residents, 1998-2015,” NBER: Research and Disability Research Center, June 2021.
Commentary: When evaluating prices of new and innovative drugs, policymakers focus almost exclusively on the supplying firm’s private marginal costs. But positive externalities, or social benefits to the public, attribute tremendous value in biopharmaceuticals that should impact the public’s willingness to pay for new drugs. For example, a new drug ameliorative to a rare but debilitating condition gives private value to sufferers able to live healthily, while also adding public value in the increased productivity, taxable wages, and reductions in social spending created by that drug. In an effort to quantify the wide range of positive externalities produced by new drugs, an NBER research associate analyzed econometric evidence on the statistical relationship that new drug classes imposed on relevant social factors like disability, Social Security recipiency, and use of medical care. His research identified a significant inverse relationship between the number of available drug classes used to treat one’s medical condition and the likelihood of an individual sufferer being completely disabled from employment, housework, or schooling.
Applying elasticity coefficients produced from the econometric models, the report found that observed U.S. innovations from biopharmaceutical firms in the 15 years preceding 2015 brought a 4.5 percent reduction in the U.S. population that was completely unable to work for a job, do housework, or go to school. This substantial reduction in the country’s completely disabled population equated to a public value of over $27 billion added annually due to earnings generated from those now able to work. Beyond reductions in disability, the study also reports that biopharmaceutical innovations yielded an additional $16 billion in savings in 2015 due to reductions in Social Security and SSI needing to be paid, as well as another $71 billion in savings from reductions in medical care that otherwise would need to have been provided. When factoring in the high value of positive externalities created by new drugs, consumer prices become a small price to pay for the wealth of private and public benefits that biopharmaceutical innovations create.