Do new drugs reduce medical costs?

There is good evidence, foremost by Eric (corrected: Frank) Lichtenberg, that the introduction of new drugs improves health outcomes. But at the same time, there is a perception that new drugs increase health care costs, and maybe so more than it improves lives.

Rexford Santerre dismisses this idea showing that new drugs even reduce medical costs, primarily by making medical procedures less necessary. The empirical analysis is performed using aggregate data by health category, by regressing the change in expenditures on the previous year's change, the change in income and the number of new drugs. I find it heroic to make claims on causation based on such a "model". All you have is a correlation after controlling for income. If you want to say anything about causation, write down a proper model with testable hypotheses, and test those, not some random equation.

Another point where I think this paper misses the mark is in the presumption that drug price controls would be bad. The pharmaceutical industry enjoys some of the highest returns thanks to the protection given by patents. These firms need to be regulated for that very reason. In fact, it would be better to drop the patenting system in the first place: this would increase the competition to be ahead of competitors, instead of hampering progress with strategic patenting. Also, drug prices would be much lower.