Estimating the impact of medical innovation

"In 1995 AIDS was the eighth-leading cause of death in the U.S. and the leading cause among men between the ages of 25 and 44. During the next three years the number of deaths among individuals with HIV/AIDS in the U.S. declined by nearly 70 percent. In this paper, we use data for the 1993-2003 period for a sample of more than 10,000 Medicaid recipients from the state of California and diagnosed with HIV/AIDS to estimate the contribution of HIV antiretroviral treatments (ARVs) to this decline and their corresponding effect on long-term health care spending. The Medicaid population is a natural one to consider given that approximately half of all AIDS patients in the U.S. are enrolled in this program. Using the detailed information on health care utilization in our claims data, we account for the fact that patients taking ARVs are significantly less healthy than the average patient in our sample. Our findings demonstrate that the increase in the use of four drugs approved by the FDA in late 1995 and early 1996 was responsible for more than 90 percent of the drop in the mortality rate from 1995 to 1998. Despite the entry of more than a dozen drugs since these four, mortality rates have remained virtually unchanged. We find that the use of the new drugs led to a threefold increase in lifetime Medicaid spending due to their high cost and the resulting increase in life expectancy. Despite this, the new treatments were costeffective, with the average additional cost in Medicaid spending per life-year saved equal to $23,000"--National Bureau of Economic Research web site.