The problems of the U.S. health-care system are mounting. Prices are high. Expenditures are unaffordable. And quality is declining. While something must be done, doing the wrong thing will cause more harm than good. And this is why Mytheos Holt’s editorial on May 18, 2017, is so disappointing.
By simplistically blaming the health-care crisis on pharmaceuticals, he is misdiagnosing the problems plaguing the U.S. health-care system. As a result, he recommends policies that will not solve the health-care system’s affordability problems and will put future pharmaceutical innovations at risk.
Part of the misdiagnosis arises because of the excessively complicated pharmaceutical market. In most markets, prices are easily observable. This is not the case for pharmaceuticals. The list prices of pharmaceuticals do not reflect the costs imposed on the payers in the health-insurance market.
Instead, the prices paid by the payers and the prices received by the manufacturers reflect the discounts and retrospective rebates negotiated by middlemen known as pharmacy benefit managers. These resulting transaction prices can vary significantly from the list prices.
For example, according to Express Scripts, the largest pharmacy benefit manager in the U.S., “[T]he average list prices for brand drugs rose 10.7% in 2016. However, unit prices for medications purchased by our clients rose just 2.5%, 22% less than the rate of increase seen in 2015 and more than 60% lower than the increase in prices, net of rebates, recently reported by major drug makers.”
In other words, an analyst calculating the increase in pharmaceutical prices in 2016 based on the list prices of medicines would claim that there was inflation of 10.7 percent. The inflation rate that the payers actually experienced was 75 percent smaller — only 2.5 percent.
Analyses that reflect the unrepresentative increase in list prices, not the transaction prices that impact the total amount of health care expenditures, provide an inaccurate picture of the pharmaceutical market.
Another part of the misdiagnosis arises from the failure to incorporate the impact from pharmaceutical innovations on prices. Historically, when the amount of innovation increases, the average prices of pharmaceuticals increases faster than the average health-care prices. And, when the amount of innovation slows, the average prices of pharmaceuticals increases slower than the average health-care prices.
Over the past several years, the average increase in the price of pharmaceuticals — adjusted for the transactions price, not the list price — was faster than overall health-care inflation. These increases also coincided with increases in the number of new novel medicines approved by the FDA (e.g. increased innovation).
In 2016, the number of innovative medicines approved by the FDA slowed. Consistent with the historical pattern, the growth in pharmaceutical inflation slowed, as well. This slowdown returns the growth in pharmaceutical inflation to its long-term pattern of being slightly slower than overall health-care inflation.
It follows, of course, that if overall health-care inflation is faster than pharmaceutical inflation in the long-term, then there are other causal factors that are driving the health care affordability problems.
These “other causal factors” are the adverse incentives that pervade the current health-care sector. For instance, the current third-party payer structure, when coupled with tort risks, dis-incentivizes competition and innovation that, if enabled, would increase the quality of health-care services while simultaneously decreasing its price.
Reforms, consequently, are necessary to improve the efficiency and competitiveness of the entire U.S. health-care system. Like most markets, these reforms should center the health-care system around patients, not insurance companies.
Such reforms will include empowering greater competition for doctors and other health-care providers, addressing tort abuse that raises medical costs, moving away from the current fee for service payment model, enabling high-risk pools to address the problems of pre-existing conditions, selling insurance across state lines to enable greater competition, and expanding health savings accounts to empower patients to better afford health insurance.
Focusing on reforms such as these will address the broader problems of affordability and declining quality that plague the broader health-care system. By sustainably addressing the broader health-care affordability problems, these reforms will also help control the rising prices of pharmaceuticals without risking the benefits from future innovations.