Cost-benefit analysis and comparative effectiveness are the big buzzwords in medical policy these days. If we are going to see 5% annual real per-capita increases in medical spending, we better be getting something for all that effort. The usual way to study cost effectiveness is with QALYs, Quality-Adjusted Life Years. The idea is that a medicine which makes you live longer, with less pain, is worth more, and we can use alternative sources (such as willingness to accept jobs with higher injury risk) to get numerical values on each component of the QALY.
But medicine has other economic effects, as Craig Garthwaite (from here at Kellogg) reminds us in a recent paper of his. One major impact is through the labor market: the disabled or those with chronic pain choose to work less. Garthwaite considers the case of Vioxx. Vioxx was a very effective remedy for long-term pain, which (it was thought) could be used without the gastrointestinal side effects of ibuprofen or naproxen. It rapidly become very widely prescribed. However, evidence began to accumulate which suggested that Vioxx also caused serious heart problems, and the pill was taken off the market in 2004. Alternative joint pain medications for long term use weren’t really comparable (though, having taken naproxen briefly for a joint injury, I assure you it is basically a miracle drug.)
We have a great panel on medical spending called MEPS which includes age, medical history, prescriptions, income, and labor supply decisions. That is, we have everything we need for a quick diff-in-diff. Take those with joint pain and those without, before Vioxx leaves the market and after. We see parallel trends in labor supply before Vioxx is removed (though of course, those with joint pain are on average older, more female, and less educated, hence much less likely to work). The year Vioxx is removed, labor supply drops 10 percent among those with joint pain, and even more if we look ahead a few periods after Vioxx is taken off the market.
For more precision, let’s do a two-stage IV on the panel data, first estimating use of any joint pain drug conditioning on the Vioxx removal and the presence of joint pain, then labor supply conditional on use of an joint pain drug. Use of any joint pain drug fell about 50% in the panel following the removal of Vioxx. Labor supply of those with joint pain is about 22 percentage points higher when Vioxx is available in the individual fixed effects IV, meaning a 54% decline in probability of working for those who were taking chronic joint pain drugs before Vioxx was removed. How big an economic effect is this? About 3% of the work force are elderly folks reporting some kind of joint pain, and 20% of them found the pain serious enough to have prescription joint pain medication. If 54% of that group leaves the labor force, this means overall labor supply changed by .35 percentage points because of Vioxx (accounting for spillovers to related drugs), or $19 billion of labor income disappeared when Vioxx was taken off the market. This is a lot, though of course these estimates are not too precise. The point is that medical cost effectiveness studies, in cases like the one studied here, can miss quite a lot if they fail to account for impacts beyond QALYs.
Final working paper (IDEAS page). Paper published in AEJ: Applied 2012.
A Fine Theorem 
Sounds like double counting to me.