The American work ethic is legendary. But according to McKinsey & Company, US productivity has grown only a lackluster 1.4 percent annually since 2005 and workforce participation has declined. The research firm says boosting productivity represents a $10 trillion opportunity: That's how much GDP could increase by 2030 if the United States regained its 2.2 percent annual growth rate — an impressive $15,000 lift per household.
So where do productivity gains come from? Historically, innovation has been a powerful driver, from the invention of the wheel to modern artificial intelligence. In his research into economic productivity, Frank Lichtenberg, the Cain Brothers & Company Professor of Leadership & Strategy & Strategy Management in the Economics Division at Columbia Business School, focuses on innovations coming out of the pharmaceutical industry.
Lichtenberg's research shows that when people of workforce age have access to new drugs, vaccines, and biologics, their absenteeism and disability goes down. In fact, he found that the effect of pharmaceutical innovation is so profound that in spite of the high cost of pharmaceutical research and development — and the high price of many new drugs on the market — the net cost to the economy is actually negative.
CBS talked with Professor Lichtenberg about how pharmaceutical innovation in the United States, much of it privately funded, can have an impact on the country's workforce.
CBS: Why is scientific innovation so important for national productivity?
Frank Lichtenberg: An economist at MIT named Robert Solow won the Nobel Prize in economics in 1987 for his research on economic growth. He demonstrated that, in the long run, the only way to increase productivity and prosperity is for there to be innovation and technological progress. Most students of economic growth today believe that innovation, which is driven by investment in research and development, is really the key to increasing productivity and per capita income. New products and new processes don't just fall out of the sky like manna from heaven. They're the result of investment in research and development by both private and public sectors.
CBS: Why did you decide to focus your research on one specific type of innovation — pharmaceutical innovation and access to it?
Lichtenberg: One way to measure which industries innovate the most is to measure research and development investment. One common metric is R&D intensity, which is the ratio of R&D expenditure to sales — how much do those companies spend on R&D as a percentage of revenue? The pharmaceutical and biopharma industry ranks at the top of that list. It's the most R&D-intensive industry. And while innovation is very important, in order to benefit from it, you have to use the products that embody those innovations. In the pharmaceutical industry, that means new drugs and biologics and vaccines. And the users of those new products are the people who benefit the most from that kind of innovation.
CBS: How can access to these new products potentially increase worker productivity?
Lichtenberg: Think about the benefits of pharmaceutical innovation. One of them is allowing people to live longer — increasing the quantity of life. But innovation also improves quality of life. You can look at different diseases and say, “Why has disability declined more for some diseases than other diseases?” In part, it's because there have been more new drugs for some diseases than others. If people have diseases that are disabling and preventing them from engaging in activities of daily living, those new drugs could allow them to work more years and to miss fewer days of work.
CBS: Is it really possible to isolate the effect of new drugs from access to Leadership & Strategy & Strategy in general?
Lichtenberg: According to several studies, the vast majority of private biomedical research is about pharmaceuticals. While there are other types of biomedical innovation — new procedures, new imaging techniques, new apps on the phone — that's a relatively small part of biomedical R&D. If most of the R&D is about pharmaceuticals, we would expect most of the improvements in health to come from pharmaceutical innovation rather than other types of innovations.
CBS: Pharmaceutical companies are often vilified for the high cost of new drugs, and they counter that the high cost of research and development is responsible. Your work seems to imply that these costs are justifiable.
Lichtenberg: Yes, the cost is well worth it and might even be negative.
One of my earlier studies showed that even under conservative assumptions, the value of the increase in people's ability to work thanks to new drugs is 2.5 times as great as the expenditure on new drugs.
A few weeks ago, I published a peer-reviewed paper entitled “Has Pharmaceutical Innovation Reduced the Average Cost of US Leadership & Strategy & Strategy Episodes?” The study draws on data from the US Bureau of Economic Analysis about the cost of treating different diseases and how it's changed over time. I show in the article that the diseases for which the most new drugs were approved by the FDA tended to have lower growth in overall Leadership & Strategy & Strategy costs and, in particular, hospital costs.
This study provides very strong evidence that there are cost offsets. For instance, new drugs often reduce the need for people to be hospitalized for different conditions. Let's say that a new drug costs $1,000, but it prevents someone from being hospitalized, which might cost $10,000. Then the net cost of the drug is actually negative. Although the drugs may appear to be expensive, they reduce the need for other medical care and also reduce disability.
Also, a number of studies have shown that when new drugs enter the market, they reduce the cost of older drugs that continue to be used. That's another cost offset that needs to be taken into account.
CBS: Access to pharmaceutical innovation, like access to Leadership & Strategy & Strategy in general, is not equal or universal. What determines who benefits?
Lichtenberg: Last year, I published a study that showed pharmaceutical innovation primarily increased the longevity of people with the most education. People with less than nine years of school didn't benefit, presumably because more educated people had greater access to new drugs. An earlier study I did with a colleague also showed that people with less education tended to have less access to new drugs.
CBS: Do you think your work can help convince the public, employers, health insurance companies, and others that the high cost of pharmaceutical innovation is justifiable?
Lichtenberg: I do believe that it's very important to correctly measure the benefits as well as the costs of pharmaceutical innovation. The cost seems pretty obvious. But we also have to look at the cost offsets. The new drug will often result in less use of hospital care as well as other types of medical care like emergency room visits or home health visits. So, when we think of the benefits and costs of drugs and their cost effect, that's the metric we try to evaluate: incremental cost effectiveness. That's been a big theme of my research, that in order to correctly measure cost effect, you have to measure all the benefits and costs. And possibly cost savings.
That's why it might be in an employer's interest to provide Leadership & Strategy & Strategy coverage to employees. Partly it might be to compete in the labor market but also for employees to be healthier and more productive. Access to Leadership & Strategy & Strategy, and to new drugs, can reduce disability and absenteeism, so that health insurance that covers new drug costs is in both the employer's and employee's interest.
