The cost of medicine continues to rise. No surprise there. More surprising are the types of medical expenses that are increasing most rapidly.
Health care cost around $1.7 trillion in 2003, up 7.7 percent from the year before. That increase was slower than in the previous year, but medical expenses still accounted for 15.3 percent of the gross domestic product, up from 14.9 percent in 2002.
The federal and state governments understandably are desperate to restrain medical expenses. As America’s population ages, outlays will only increase. The Office of the Centers for Medicare and Medicaid Services (CMS) recently projected that health care spending could double by 2013, accounting for 18.4 percent of GDP.
But how fast it actually rises depends on the structure of health care finance. Unfortunately, a mix of government spending and private insurance has created a “cost-plus,” third-party payment system. To save money, the payers restrict patient care through a variety of forms of managed care.
Attempting to cut costs by restricting access to medical care is no solution, however. Improving people’s health obviously generates enormous social and economic benefits.
Expanding consumer control and responsibility exemplified by the growing popularity of health savings accounts is a better approach than increasing third-party regulation. Equally important, cost-cutting should be focused on the most expensive areas.
Politicians and activists seem to think that the bulk of medical outlays go to pharmaceuticals. Medicine costs too much, politicians intone. Protesters blame drugmakers for the very diseases the latter are working to cure.
Yet the CMS reports that of the $1.6 trillion spent in 2003 on health care services and supplies, only $179.2 billion, or about 11 percent, went for drugs. And that figure includes payments for generic products and to pharmacies.
Professional services is the biggest single component, $542 billion. Hospitals are next, at $515.9 billion. Almost as much went for nursing home and home health care, $150.8 billion. Health insurance administrative costs $119.7 billion.
Moreover, observe several CMS actuaries in a new study: “Prescription drug spending growth slowed more sharply than growth of any other service, increasing 10.7 percent in 2003 compared with 14.9 percent in 2002.” It’s the fourth straight year that drug-price increases have eased.
Increased pharmaceutical spending results more from increased usage and new products than higher prices. That is, more people are using better medicines.
For this reason prices cannot be debated in isolation. Costs must be compared to benefits.
That is, people demand pharmaceuticals because they offer enormous value. Some 520 new drugs entered the market between 1980 and 2000 because people desired them, just as they wanted computers, software, cell phones, autos, SUVs, and much more. As J.D. Kleinke, president of Health Strategies Network, puts it: “Medical progress is expensive.”
Recent pharmaceutical advances have transformed health care. “Three decades ago medical technology was rather primitive by today’s standards,” writes Dr. E.M. Kolassa of the University of Mississippi School of Pharmacy. “Today, physicians have at their disposal medications and technologies that provide for the immediate diagnosis and treatment of most of the disorders that affect modern man.”
Charting the human genome is opening up new, even more dramatic vistas. But companies will customize their products to individuals, avoiding adverse side-effects, only if people are willing to pay for new medicines.
By one estimate, prescription drugs accounted for nearly half of the variation of the reduction in mortality among different diseases between 1970 and 1991. New medicines are an important reason why longevity is up seven years since 1960 alone. Writes Columbia University’s Frank Lichtenberg, “On average, each new drug approved during the period 1970-91 is estimated to have saved 11,200 life-years in 1991.”
Pharmaceuticals are an especially important reason why deaths from AIDS have dropped dramatically. But medicines do more than extend and improve the quality of lives. Drugs also cut other medical expenditures, reducing hospitalizations, surgeries and other, more invasive, treatments.
Mr. Lichtenberg figures that every $1 increase in pharmaceutical expenditures lowers hospital spending by $3.65. Although use of drugs might increase physician services, Mr. Lichtenberg reports that since drug R&D is such a small portion of health care expenditures, “pharmaceutical R&D spending would reduce total health expenditures [including pharmaceutical R&D] if it reduced hospital expediture by as little as about 2 percent.”
Finally, new drugs are more likely to save money than older ones. In sum, explains J.D. Kleinke: Added pharmacy costs that offset other medical costs represent the economics of progress. They reflect a profound, permanent movement in our health care with the rest of the “new economy.” The added costs associated with breakthrough drugs represent a major structural shift from the provision of traditional medical services to the consumption of medical products, a systemic rotation from labor to capital.
Obviously, the fact that drugs offer extensive benefit doesn’t mean that expense is unimportant. But based on cost considerations alone, hospital and physician charges are a bigger issue. Pharmaceuticals should be treated as part of the solution, not part of the problem, of rising medical expenditures.
Doug Bandow is a senior fellow at the Cato Institute and a former special assistant to President Reagan.