Health care is becoming less affordable every year. Over the past 10 years, national healthcare expenditures have grown 45 percent, but our economy has grown only 28 percent.
This isn’t sustainable; and, solving this problem should be a top policy priority. However, “rounding up the usual suspects,” as Captain Renault might suggest, will not make U.S. health care system more affordable.
One of the usual suspects is drug costs. Polling shows the American public blames pharmaceutical companies for high healthcare prices, perhaps explaining why politicians continue to float various direct and indirect price controls on drugs.
In reality, drug prices aren’t the cause of rising healthcare costs. Over the past 10 years, drug spending grew 39 percent – less than the growth in total health care expenditures. In 2016, national healthcare expenditures grew 4.3 percent, but pharmaceutical expenditures grew 1.3 percent. Spending on all drugs grew just 0.6 percent in 2017, according to consulting firm IQVIA’s Medicine Use and Spending report.
Solving the healthcare affordability problem requires fundamental regulatory reforms that address the inefficiencies that pervade the healthcare system.
For example, the complex drug contracting system enables middlemen, known as pharmacy benefit managers, to obscure the price of medicines and capture an outsized share of total drug expenditures. These middlemen obscure the prices for medicines causing patients’ out-of-pocket drug costs to often rise much faster than overall drug costs.
PBMs are also growing their profits at the expense of the rest of the industry. According to a Berkeley Research Group study, PBMs’ share of expenditures grew 5.2 percentage points at the expense of branded manufacturers, pharmacies, and wholesalers.
Considering these problems, many organizations are making fundamental reforms, such as the changes implemented by Caterpillar and documented by Peter Pitts, a former FDA Associate Commissioner. Caterpillar embarked on systemic reforms that eliminated unwarranted conflicts of interest, simplified the complex pricing system, encouraged pharmacies to compete with one another, and established a more flexible provider network. The result has been lower drug costs for Caterpillar and its employees.
These private reform efforts could be enhanced through policy reforms that increase pricing transparency to foster more competition. Such reforms should also ensure that patients benefit from the negotiated price savings.
PBM reforms are only part of the solution.
Despite innovations such as CVS’ MinuteClinic, or app-based health care such as Doctors on Demand, regulatory barriers constrain healthcare modernization efforts. Reforming regulations such as scope of practice laws could allow more nurses to provide quality, cost-effective care and make it easier for doctors to treat patients remotely via tele-health practices.
Relatedly, the government-imposed distortions on the health insurance markets prevent more efficient insurance services for patients. These regulations should be repealed to enable a more competitive and responsive insurance market for consumers.
Defensive medicine, or the need to order more tests and procedures to protect against frivolous lawsuits, costs $700 billion annually. Comprehensive tort reform could reduce wasteful healthcare spending and improve the quality of care.
These systemic reforms are, by no means, comprehensive. They illustrate the types of reforms that will address the fundamental problems plaguing the health care system, however.
Unlike these reforms, attempts to artificially control the price of pharmaceuticals would endanger future innovation, wouldn’t address the drivers of the larger healthcare affordability problem, and would distract from reforms that could improve affordability.