Issue No. 2: New Reports on Health Spending Need Context

The U.S. Can't Reform a Broken System Without Understanding Which Parts Are Really Broken 

Imagine a drug company discovers a cure for Alzheimer’s, a disease that currently afflicts more than 5 million Americans. According to the Alzheimer’s Association, “Alzheimer’s is the only disease among the top 10 causes of death in America that cannot be prevented, cured or even slowed.” But just assume that you’ll be able to take a pill every day for three months and your illness is obliterated, with few side effects – the same results that new drugs provide for Hepatitis C. 

Now imagine the Alzheimer’s drug is priced at $20,000 for a three-month supply of pills and that all 5 million people with the disease will benefit and that they all take this cure in a single year. Total cost: $100 billion. Total prescription drug costs today are about $325 billion. So in our scenario, a new Alzheimer’s drug, in a single year, would increase total spending on medicines by about one-third. 

Imagine the public outcry! But also imagine the public benefits. Alzheimer’s and other dementias will cost the U.S. $236 billion in 2016 alone, and that figure does not quantify the suffering and death the disease brings.

As we pointed out in our first newsletter, If a drug were invented to prolong the onset of Alzheimer’s by just five years, the estimated savings to the health care system would be $367 billion. An immediate cure would save a multiple of that figure.

Our little scenario points out the distortions involved in looking at drug spending increases without context. Drug spending does indeed rise every year, at times at a greater rate than inflation, but it’s not the same drugs with the same benefits. 

Sovaldi and other cures for Hepatitis C have boosted aggregate spending on medicines in recent years, but they have prevented spending in other parts of the health sector. A patient who is cured of Hepatitis C will probably not have to be hospitalized for a liver transplant, so the effect of higher drug spending in this case means significant reduction in the use of other more expensive interventions and overall healthcare costs.


New Report Shows U.S. Spends More Than One-Sixth of GDP on Health 

This is important background for understanding new reports on health spending in 2015. Data from the CMS actuary’s office, published Dec. 2 in Health Affairs, show that overall U.S. health care spending was $3.2 trillion, or 17.8% of GDP. Spending was about $10,000 per American, an increase of 5.8% over 2014, which followed an increase of 5.3% in 2014 over 2013. One reason for the rise was simply that more Americans (91% of us in 2015, compared with 84% in 2010) are insured privately or by Medicare or Medicaid. Another reason was that the growth in spending for the most labor-intensive healthcare has been rising. Spending for physician and clinical services, rose 6.3%. Hospital spending grew by 5.6%. 

Those are the big categories. Hospital costs are now more than $1 trillion a year, and physician and clinical costs are $635 billion. Combined, those categories represent half of all health-care spending.

What about spending on medicines? That $325 billion figure cited above is a rise of 9% over last year. “The increase,” writes reporter Rachana Pradhan, “was the result of higher spending on new drugs for conditions like hepatitis C and cancer, price increases for existing branded products, as well as increased spending on generics.”

A new study by the Health Care Cost Institute found that the prime movers in cost increases were anti-infective agents, and the biggest declines were in cardiovascular drugs. The trend in lower-cost generics has been dramatic. According to an article onGeorgetown Public Policy Review on Dec. 8, some 88% of all prescriptions last year were for generics, compared with 57% in 2004. 

A report by IMS Health projects that spending on medicines will reach $370 billion to $400 billion by 2020, adding….

This growth will reflect increased spending on innovative medicines, offset by lower spending on brands that will lose market exclusivity over the next five years…. The prospects for additional innovative medicines becoming available for patients through 2020 are very bright. The late-phase pipeline holds 2,320 novel products, and an average 43-49 NASs [new active substances] are expected to be launched annually over the next five years.

The IMS report also says, “While brand price increases are expected to continue in the 10-12 percent range on an invoice basis, they will be significantly offset by rebates, discounts and other forms of price concessions.” In fact, reports IMS, net price growth in 2015 actually slowed to 2.8% as concessions by manufacturers increased.

Americans Pay More Out-of-Pocket for Drugs Than for Hospitalization or Doctors

A big reason that Americans feel the pain of drug prices is that insurance policies, are we pointed out in the last newsletter, are constructed so that the insured pay much more out of their pockets for drugs than for other kinds of health care. For example, according to CDC data, you pay 15% of the cost of medicines but only 3% of the cost of being hospitalized.

A single medical hospital admission now costs $17,689, according to the HCCI report. An outpatient emergency room visit now costs $1,863. Those high costs are precisely what pharmaceuticals often prevent.

But the key piece of context is this: Drugs represent 10% of total health care costs, compared with 32% for hospital spending, and 20% for physician and clinical services. The share of total costs represented by drugs has remained roughly the same since the 1960s. (These are CMS numbers, and they underestimate the impact of drug costs because they place drugs administered by physicians in the  physician or hospital spending category. The all-in total for drugs is closer to 13.) 

Cost Is the 'Most Urgent Health Problem'
On Dec. 7, a Gallup survey found that “cost” is the “most urgent health problem” cited by Americans, well ahead of “access,” in second place. Of those polled in an open-ended question, 27% picked cost as the top health problem, up from 17% in 2009. Cost finished far ahead of cancer, heart disease, and drug and alcohol addiction.

Yes, we spend a great deal on health care – half-again as much as any other developed country in terms of proportion of GDP. We get a lot for that money, but the system is clearly broken and badly needs reform. Before responsible changes can take place, however, policy makers and the public have to understand the true state of affairs today and make judgments based on facts, not emotion. This newsletter is an attempt to help.