Issue No. 1: Study Shows U.S. Health System Often Delivers Less for More

To Fix It, Look to the Real Cost Drivers
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A report from the Commonwealth Fund, just released on Nov. 16, finds that out of 11 wealthy countries, adults in the United States are the most likely to go without needed health care. 

Over the past year, says the study, “one-third of U.S. adults went without recommended care, did not see a doctor when they were sick, or failed to fill a prescription because of costs.” That compares with just “7 percent of respondents in the U.K. and Germany and 8 percent in the Netherlands and Sweden.”

The U.S. figure is down by four points from 2013, due in part from the expansion of health insurance in the Affordable Care Act, but it is still a shocking number. The study also found that Americans are most likely, among citizens from the 11 countries, to have multiple chronic conditions. The U.S. leads in multiple conditions in both categories surveyed: low-income adults (over 40 percent) and all other adults (25 percent).

What makes these numbers so disturbing is that this poor access to health care – and the dire effects on well-being – are occurring in the nation that spends more on health than any other developed country: 18 percent of our gross domestic product. No other developed country spends more than 12 percent.

To make the right repairs, we have to understand which parts are truly broken. That’s not easy. The system is complicated and opaque, and myths pervade the public discourse.

Where are the Costs Highest?

First, look at the biggest cost drivers. What is making the U.S. system so expensive?

Prescription drugs have been the focus of a great deal of attention lately, but they represent only about one-eighth of health care costs. The biggest category of spending, by far, is hospital services, accounting for about one-third of health spending, followed by physician and other professional services, at one-fifth. Says Michael Mandell of the Progressive Policy Institute (PPI):

The anger directed at the pharmaceutical and biotech industries overall is misdirected. The single biggest driving force for increased health-care spending in the U.S. is the rising cost of labor, not drugs.

Here’s another way to look at costs. In the U.S., we spend 2 percent of our GDP on prescription drugs. In other developed nations, the figure is about the same: 1.5 percent. As Paul Howard of the Manhattan Institute has pointed out, “U.S. spending on drugs accounts for a smaller share of total health care spending…than in Europe, where drug price controls are in place.”

The proportion of total U.S. health costs that prescription drugs represent has been about 13 percent for a long time, and it is expected to stay that way through at least 2023, according to a study by Center for Sustainable Health.

Just as important, prescription drug costs have been rising no faster than other health costs – and lately even slower. “Spending on pharmaceuticals,” writes Peter Pitts of the Center for Medicine in the Public Interest, “is growing at a slower rate (under 4 percent) than either hospital (just under 5 percent) or physician costs (just over 5 percent). This breakdown is based on the Bureau of Economic Analysis monthly spending data, including its most recent update released on Aug. 29 of this year.” 

Last year, according to an analysis by the PPI, labor costs accounted for 47 percent of the increase in total health expenses; pharmaceutical costs, just 18 percent. 

​Nor are drugs the primary reason that insurance premiums are rising. Outpatient costs, incurred in doctors’ offices and care centers, account for 30 percent of the expected rate increases for 2017; prescription drugs, just 14 percent.  ​

​Medicines, in short, do not explain the high costs of the U.S. health care system.

Drugs Can Lower Overall Health Costs

In fact, there’s a good argument that drugs lower costs overall. First, they prevent patients from having to use the more expensive parts of the system, like hospitals. For example:

• New drugs can, in three months or less, actually cure Hepatitis C, a disease that, left untreated, can lead to cancer and require a liver transplant at a cost of more than $500,000. 
• Every additional dollar spent on diabetes medications saves seven dollars in other medical costs.  
• 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.   
  

​Writes Wayne Weingarten of the Pacific Research Institute:

Even if pharmaceutical spending were rising as a share of total health care spending, but that rise was due to pharmaceutical investments driving down expenditures in other health care areas (e.g. a reduced need for more expensive surgeries), then it would still be inaccurate to argue that pharmaceutical spending is driving overall health care inflation.

Second, drugs are the only health category with built-in reductions in costs, which fall over time as patents expire and competition accelerates. For example, the generic forms of Lipitor and Plavix (which fight heart disease) and Seroquel and Zyprexa (anti-psychotics) cost 90% less today than the brand versions did in 2010. Many cancer drugs, including Gleevec (leukemia), are losing patent protection and becoming available at discounts of 50% or more.

Bending the Cost Curve

What can we conclude from these facts? The best way to bend the cost curve is to keep people out of the hospital and prevent them from incurring high outpatient expenses as well. And the best way to do that is through making sure we all have access to the best medicines – and take them as prescribed. There are other important ways to bend the curve as well through prevention, with regular exercise, quitting smoking, cutting alcohol intake, losing weight, reducing stress.

In a recent speech, Ian Read, the CEO of Pfizer, pointed to ways to bend the cost curve:

• Create incentives for prevention, such as waiving co-pays for preventive care services or reducing premiums for people who take steps to improve their health.
• Give physicians, hospitals and insurers the flexibility to address patients’ needs such as transportation and nutrition, and then reward patients and their care givers for such improvements as losing weight and quitting smoking.

​Toby Cosgrove, CEO of the Cleveland Clinic, stresses the link between costs and benefits: “

Value for your dollar has a lot to do with quality and outcomes and transparency. It turns out that in health care, there is very little information about what quality is. To improve value, you still have to measure costs, but you also have to measure quality, in terms of outcomes.

In addition, health care has to carry social burdens that in other countries are the responsibility of government programs – fighting poverty and substance abuse, for example, or offering nutrition guidance -- that help prevent disease in the first place. Thisremarkable chart from the New England Journal of Medicine tells the story graphically. One reason the U.S. is spending so much on health care is that it spends so little on social services.

Why Drugs SEEM Expensive: The Way Insurance Policies Are Designed

While medicines represent only a relatively small proportion of total health costs, many Americans believe these prescription drugs are a major financial burden. Why? Because Americans pay out of their own pockets a big chunk of total drug costs.

These alarming statistics tells the story: Americans pay out-of-pocket 15 percent of the cost of prescription drugs but only 3 percent of the cost of hospitalization. So, even though hospital costs are three times greater than drug costs, we pay over 40 percent more out of our pockets for drugs than we do for hospitalization. The reason: the design of health insurance policies.

The disparity makes little sense. Taking medicine, of course, can prevent hospitalization. 

Another problem is the sheer complexity of the system of delivering and paying for drugs. Pharmaceutical Benefit Managers play a big role including holding down the costs of drugs for insurers. PBMs make money on the spread between the price they charge their clients (insurers and employers who provide benefits for their employees) and the amount they pay the pharmacy. PBMs also get administration fees from clients, plus rebates from drug companies (some of which are reimbursed back to clients). We’re not going to go into all the details here. Suffice it to say that things are complicated. 

Here is a chart to show what we mean...

What is not complicated is that over time health insurance plans are asking patients to pay more out of pocket for their medicines…. Since 2011, the proportion of employer-sponsored health insurance plans with a pharmaceutical deductible has doubled – from 23% to 46%. 

PBMs perform an important service, but they sometimes get between doctor and patient. PBMs have a shorter-term view. Cutting immediate costs can raise long-term costs if the patient does not get the medicine the physician prescribes. Also, these middlemen reduce accountability in the system. Accountability should lie with patient and physician.

Complicated? Yes. But a clear-eyed view, focused on the facts, can help us improve the health care system, with its intricate web of rules and relationships that determines costs. As Pitts, a former Food & Drug Administration associate commissioner, writes:

New and better drugs aren’t the problem; they’re the solution to America’s worsening chronic disease burden. Demonizing the creators of these medicines will do nothing to bring down patients’ skyrocketing co-insurance payments and deductibles.