National and International Tests of the New Drug Cost Offset Theory

The new drug cost offset theory argues that new drugs pay for themselves by keeping people out of expensive medical facilities. However, few studies have tested this theory at the macroeconomic level to determine if system‐wide savings actually accrue. This article provides two tests of the new drug cost offset theory by examining the impact of new drugs on aggregate medical care costs using time‐series data for the United States and also by using a panel data set of countries belonging to the Organization for Economic Cooperation and Development. In support of the new drug cost offset theory, the results from both tests imply the typical new drug slows the growth of overall medical care spending.