Does Increased Drug Use Increase Medicare Efficiency?

Interesting post on Healthcare Economist referring to a post by Gary Becker on the The Becker-Posner blog. He makes an interesting argument that Medicare Part D will increase Medicare efficiency due to the following effects:

1. Increased government payment for drugs will increase innovation, particularly for drugs used in the elderly
2. Better drugs and better access can offset more expensive medical care (e.g., hospitalizations)
3. High fixed costs for R&D, but low marginal costs for production, means that the average cost of drugs will decrease

I have seen reports of increased R&D, but do not have the references handy. Can anyone help out here? I also think that most people accept that better drug use can more than offset other medical expenses. In addition to better access, this also should focus on better drug selection and efforts to reduce drug therapy problems (e.g., noncompliance).

I do not think that the low marginal costs of production will reduce the average cost of drugs. The marginal cost is already so low that the gains would be negligible compared to the overall price of the drug. The majority of recent reductions in drug trend can largely be attributed to increased patent expirations and resulting generic introductions.