Do newer prescription drugs pay for themselves? Searching for appropriate empirical methodologies

Newer and more expensive drugs account for a large proportion of the recent rapid growth of prescription drug spending. However, if use of newer drugs can reduce spending on other medical services, it may save total healthcare costs (the "cost-saving effect"). Aggregate-level evidence of the cost-saving effect is supported by two well-cited studies conducted by Frank Lichtenberg. He argued that in the aggregate, using new drugs reduces total healthcare costs. In Paper 1, I reassess this evidence and conclude the original findings are not maintained under plausible alternative approaches. Thus, we do not have robust evidence of the aggregate cost-saving effect. Furthermore, wide variations in safety, efficacy and costs exist across drugs and diseases. In Paper 2, I investigate the cost-saving effect in one clinical area--atypical antipsychotic agents compared with traditional mood stabilizers as long-term treatment for bipolar disorder. Using commercial insurance claims data from 1998-2001, I test the hypothesis through several econometric methods, including a propensity-score matching, interrupted time series, differencing strategies, and an instrumental variables approach. Each me