The Productivity of Pharmaceuticals in Improving Health: An Analysis of the OECD Health Data

Although a number of studies have been conducted on health production functions, little attention has been given to pharmaceuticals as a separate input into the production of health. Building upon existing published work, this paper uses an alternative specification and more recent data to estimate the effect of pharmaceutical expenditures on levels of health in the member countries of the Organization for Economic Cooperation and Development (OECD). In a sample of developed countries, we found that pharmaceutical consumption, as measured by per capita drug expenditures, has a positive effect on life expectancy at advanced ages. The marginal effect of pharmaceutical consumption is consistent with estimates that have been reported previously but appears to decline with increasing age. Over the past few years, the substantial and disproportionate growth of pharmaceutical expenditures for public and private payers in the U.S. has led to calls for regulatory intervention (e.g., price controls). However, our research suggests that increases in drug spending may yield further increases in life expectancy.