In the opening pages of his recently released budget, Pres. Barack Obama describes the rising cost of health care as “one of the big drains on family budgets and on the performance of the economy as a whole.” Later in the budget, he suggests that America spends too much on prescription drugs — implying that drug prices are responsible for our high health-care costs. This is a popular misconception, and it will likely hinder Obama’s plan to revamp the U.S. health system.
At first glance, it’s understandable that some believe drug expenditures are inflating overall health-care costs. In 2007, the United States spent $286.5 billion on prescription drugs. To put that figure in perspective, it’s more than the entire GDP of Ireland. In isolation, that’s impressive. But one must remember that prescription drugs actually reduce medical spending by obviating the need for prolonged hospital stays and expensive surgeries.
Among the biggest drivers of rising health-care spending are chronic diseases. These are illnesses, such as diabetes and heart disease, that demand regular treatment over the course of a patient’s life. Between 1994 and 2004, the prevalence of diabetes doubled. High blood pressure is also on the rise. And heart disease now kills one person every 34 seconds.
Caring for people with chronic diseases now accounts for about 85 percent of all U.S. health-care spending. Thus, one of the most effective ways to lower overall health-care costs would be to control chronic diseases. And drugs have proven to be one of the most effective — and least expensive — ways to do that.
A 2005 study published in the journal Medical Care found that every additional dollar spent on drugs for blood pressure, cholesterol, and diabetes reduces other health-care spending by an average of $4 to $7. Similarly, a recent paper from the National Bureau of Economic Research estimated that Medicare saves $2.06 for every dollar it spends on medicines. This makes sense. A daily dosage of Lipitor is cheaper than emergency heart surgery.
Of course, drugs are not necessarily cheap. The process of developing a new drug is extraordinarily expensive — on average, it takes 10 to 15 years and $1.3 billion to bring a new drug to market. This tremendous investment is reflected in the prices we pay. In recent years, however, there has been evidence that drug prices are falling.
In September 2007, the U.S. Department of Labor reported that the annual inflation rate for drug prices was at its lowest point in the three decades since Labor began tracking it. The annual inflation rate was 1 percent, well under the rate of overall inflation.
President Obama would be wise to keep this in mind as he moves forward on health-care reform. If he doesn’t, he could end up hurting the industry that is most able to drive health-care prices down.
— Sally C. Pipes is president and CEO of the Pacific Research Institute. Her latest book is The Top Ten Myths of American Health Care.
*This article also appeared in the following publications. Title may vary.
The Daily Messenger (Canandaigua, NY), March 19, 2009
Daily Citizen (Dalton, GA), March 25, 2009
Cherry Creek News (CO), March 26, 2009
Roanoke-Chowan News-Herald (Ahoskie, NC), April 2, 2009
Bullhead City Bee (Bullhead, AZ), May 7, 2009