Reducing the cost of medical care, rather than health insurance, is so often underemphasized or even absent from discussions of reforming the health care system. And yet lowering costs of medical care is essential for broadening access to care, reducing insurance premiums and ultimately ensuring better health.
Lowering the cost of care, though, is fraught with peril. It must be achieved without jeopardizing quality, restricting access or inhibiting essential innovation. In other words, without harming American medical care, which has become the standard of excellence around the world.
Nowhere is this process of reform more perilous than in the world of prescription drugs, which has recently come under fire for highly publicized instances of price gouging, as well as inflammatory comments by CEOs like Martin Shkreli.
The newly nominated head of the Food and Drug Administration, Dr. Scott Gottlieb, will likely confront drug pricing as soon as he takes office. The key to addressing prices without slowing innovation in drug discovery is to rid the system of unnecessary regulations, facilitate competition and eliminate taxes that are ultimately passed on to consumers.
But before we address the specifics of how to improve the system for patients, it’s worth noting some important facts about prescription drugs in the United States.
First, prescription drugs constitute only 11% of US health expenditures, according to the Centers for Disease Control and Prevention. US drug spending ranks in the bottom one-third of comparison lists with other developed nations, equivalent to the United Kingdom and significantly less than over 20 of 31 developed nations reporting.
Moreover, differences in drug costs account for a very small fraction of the differences in health care spending between the United States and other countries — for instance, only 6% of the difference in total spending between the United States and Canada. Although undeniably a serious problem for some individuals, drug prices are not one of America’s most significant health cost issues.
Second, Americans enjoy access to lifesaving drugs earlier than anyone else in the world. Before the Affordable Care Act was signed into law, the United States was home to the highest number of cancer drug launches, by a factor of at least four, compared to any country studied in the previous decade, including Germany, Japan, Switzerland, France, Canada, Italy or the United Kingdom, according to the Annals of Oncology in 2007.
And in a Health Affairs study of 35 new cancer drugs submitted from 2000-2011, the FDA had approved 32 while the European Medicines Agency approved only 26. Median time to approval in the United States was about half that in Europe. And all 23 drugs approved by both were available to US patients first.
Even in the most recent data, two-thirds of the novel drugs approved in 2015 were approved in the United States before any other country.
Third, America’s system, before the ACA, delivered better treatment results than nationalized systems, where drug prices are more regulated, for virtually all serious diseases reliant on broad access to drugs, including cancer, heart disease, stroke and the most important chronic disorders like high blood pressure. Better control of high blood pressure saves lives, but it also saves money that would be spent on serious complications, if uncontrolled, like severe heart disease.
What would happen with federal price controls on drugs?
Many politicians, including both Democrats and Republicans, have called for price caps to control drug prices, a notion popular with many voters in the wake of highly visible instances of price gouging.
But we already know from history that price caps don’t provide the desired products at lower prices; instead, caps always restrict the availability of the product, whether that product be gasoline for cars, rent for apartments or anything else.
Drugs are no different. Iain Cockburn, a professor of management at Boston University, used data on launches of 642 new drugs in 76 countries to show that price regulation strongly delays drug launches. And Thomas Abbott with John Vernon, health care economists at the University of Connecticut, showed that pharmaceutical price controls significantly diminish the incentives to undertake early stage research and development investment. In that study, cutting prices by 40% to 50% in the United States will lead to 30-60% fewer early stage research and development projects.
And Rexford Santerre, a professor of health care management at the University of Connecticut, calculated that drug price controls would have led to 198 fewer new drugs being brought to the US market from 1981 to 2000, and at a cost of about $100 billion more than the estimated consumer savings from those drug price controls.
In other words, even in financial terms alone, the benefits of a new drug are far greater than the savings from price controls.
Wouldn’t Americans benefit from the dominant negotiating power of government-run insurance?
To reduce drug prices, many leading Democrats call for expanding the negotiating power of the federal government through Medicare. And it seems President Trump may agree, after recently emphasizing his plan to “negotiate” drug prices through Medicare.
Both Democrats and Trump are disregarding established facts and ignoring decades of experience from other countries, like the United Kingdom, Canada and Sweden, on how government-dominated drug pricing harms patients. Indeed, Sweden finally privatized its pharmacies after decades of government ownership in response to severe problems with drug availability.
Just this month, England’s National Health System introduced a new “Budget Impact Test” to cap drug prices that will intentionally further restrict drug access, even though the delays will break their own pledges to speed up the delivery of drugs to patients and contradict NHS Constitution pledges about timely delivery of care.
Just as important, if the buyer is as dominant as Medicare, a price negotiation could easily lead to new limits on availability of the good, even though prices would be lowered. In the case of prescription drugs, it is only we, the patients, who suffer if the negotiation leads to the negative outcome of limited drug availability. The government has little to lose here; we patients harbor virtually all the risk of the unintended consequences.
What should be done to reduce drug costs?
Instead of even more regulation, the Trump administration’s policy should focus on enhancing competition, the single most important way to alleviate high prices for prescription drugs.
The first step is to deregulate the massive bureaucracy that interferes with new drugs coming to market. Burdensome bureaucratic hurdles have created the extraordinary 14 years in time and $2.5 billion in costs for new drug development and approval (delays for drugs and devices are now far longer than even in Europe), a cost that has multiplied by a factor of 10 in the past decade, according to the Tufts Center for the Study of Drug Development.
The second step is to facilitate generic drugs coming to market — the most powerful price competition to prescription drugs. According to an FDA analysis, the first generic competitor reduces prices only slightly. However, a second generic manufacturer reduces the average price by nearly half. For drugs that attract a large number of generic manufacturers, the average generic price falls to 20% of the branded price and even lower after another seven years.
Over the past decade, development costs for generics exploded fivefold while time-to-market scaled from 16 months to 42 months, according to the nominated head of the FDA, Gottlieb. While significant improvements have been made by the FDA in paring down this backlog, this should continue to be the focus.
Let’s further streamline the overly long FDA approval process for lower-cost generic drugs and allow re-importation limited to generic drugs, which have neither new intellectual property nor new active substance risks.
Third, on a broader level, markedly expanding health savings accounts would let consumers control the money and incentivize cost consciousness for all health expenses. The administration should also immediately eliminate the Affordable Care Act taxes and overregulation on the pharmaceutical industry that have been passed on to consumers and have generated unprecedented consolidation that harms patients.
If the new administration doesn’t follow these steps and instead repeats Obamacare’s fundamental mistake of top-down regulation, patients will undoubtedly suffer. Such overregulation would distort markets, limit development of drugs, inhibit innovation and create disincentives for risk-taking. In medical terms, this means more people will die, a consequence proven throughout the world by systems relying on such policies.
