The flaws driving up costs across the broader health care landscape are also driving up the costs for innovative drugs. After all, pharmaceuticals are an integral component used in combination with the broader healthcare system. As a result, spending on medicines both influences and is influenced by the spending on all other healthcare services.
Evaluating the total amount of spending on drugs as a share of total healthcare spending provides important perspective, consequently. As Drug Channels notes, “total net drug spending accounts for about 15 percent of U.S. health spending.” Importantly, “net retail and nonretail drug spending accounts for 14% to 18% of total healthcare spending in most countries.” In other words, “U.S. drug spending is—and has been—in the middle of the pack as a share of total healthcare spending. That’s because EVERYTHING [sic] costs more in U.S. healthcare, not just pharmaceuticals.”
Thus, affordability issues for innovative medicines exist because of the flawed employer-based third-party payer system in the U.S. This also means that broader reforms that improve the incentives of the health insurance market and the delivery of health care more broadly will also promote greater drug affordability.
Beyond these necessary broader reforms, addressing specific inefficiencies to the drug market and the spillover impacts from foreign price controls are also necessary. For instance, inefficiencies that plague the current drug rebate system encourage the use of higher priced medicines rather than more affordable competitive medicines such as biosimilars. These disincentives inflate overall drug spending.
The adverse impact on patients from the higher spending is amplified because the typical health insurance design inequitably shifts a disproportionate share of these costs onto patients. As a result, insurance too often fails to cover the costs for patients when an actual health insurance risk arises (e.g., a patient requires an expensive medicine).
The abuse of programs such as 340B compound these disincentives. The intention of the 340B program is to help lower-income and uninsured patients by stretching the resources of hospitals and other providers that disproportionately serve these populations. Due to the disincentives and abuse of the program, 340B is now encouraging the use of higher cost drugs, raising costs for patients, subsidizing major pharmacy retailers, and encouraging unwarranted consolidation of providers.
With respect to price controls in other countries, it is widely accepted that these uneconomical policies raise drug costs for U.S. patients and/or reduce resources available to develop new innovations. Due to these impacts, price controls in other nations reduce the efficiency of U.S. drug markets and harm U.S. patients. The price controls also harm patients in the countries that are imposing these regulations by reducing their access to available treatments.
Promoting greater affordability while maintaining patients’ access to medicines requires beneficial reforms that target the specific flaws that pervade the system. Specifically, policies need to fix the disincentives created by the third-party payer system, improve price transparency for drugs, reform the current drug rebate system, and reform the 340B program. Focusing reforms on these areas is the surest way to promote the dual goals of affordability and continued innovation.
Wayne Winegarden, Ph.D. is a Sr. Fellow in Business and Economics and the Director of the Center for Medical Economics and Innovation at the Pacific Research Institute.
