Cultures from biblical times to the ancient Chinese have all expressed some form of the wisdom that the best form of charity is to prevent poverty in the first place. This wisdom is lacking today, particularly with respect to the U.S. health care sector.
A recent analysis by investment research firm Sanford C. Bernstein & Company “found that pharmaceutical manufacturers’ patient assistance programs (PAPs) account for 10 of the largest 15 U.S. charities and provided $6.5 billion of support in 2014.”
Ancient wisdom shows that there is a better approach – fix the U.S. health care sector to minimize the need for charitable donations in the first place. Toward this end, a lot of work is needed.
Currently, there is a growing chorus claiming that price controls on pharmaceuticals, and single payer control of the health care industry, are panaceas that will improve health care affordability. Nothing could be further from the truth.
The entire health care system, not just the pharmaceutical market, suffers from an affordability problem. For example, as of 2014 (the latest data available), U.S. per capita expenditures on pharmaceuticals were 127 percent larger than the average per capita expenditures on pharmaceuticals across the OECD (an organization of high-income economies).
While disconcerting, such discrepancies are typical for the entire U.S. health care system. The average per capita expenditures on health care were 144 percent larger in the U.S. compared to the average of the OECD, which expanded further to 150 percent in 2015.
Since higher U.S. pharmaceutical expenditures are indicative of the higher U.S. health care expenditures more broadly, fixing the health care affordability problem (whether for pharmaceuticals or any other sector of the health care industry) requires systemic fixes.
Staring with fixes to the pharmaceutical market, reforms should remove the disincentives that are creating adverse outcomes. For example, the current pricing model for pharmaceuticals is overly-complicated and diminishes the beneficial role prices typically play in a market economy.
Currently, pharmacy benefit managers (PBMs) prosper when manufacturers charge higher list prices, which enable PBMs to negotiate large rebates and discounts. The transaction price for their customers is, consequently, much lower than the list prices indicate. However, the overly-complex pricing system obscures the actual transaction price.
Perhaps even worse, most rebates are not passed on to patients and, since most co-pays are based on the list price, individuals’ co-pays are higher than they should be. Pricing reforms that establish a simpler, more transparent pricing structure are necessary.
While important, these reforms will not sustainably address the broader problem of medical care affordability. Sustainably improving the quality and pricing of health care requires reforms that eliminate adverse incentives and improve competitiveness across the entire U.S. health care system.
Take the proliferation of the fee for service payment model as an example. This payment model incents excessive expenditures without necessarily increasing the quality of health care. Payment reforms should encourage competitive approaches that better connect higher payments with higher quality.
Additionally, out of control tort liability costs worsen the affordability problems inherent in the fee for service model. Consequently, tort reform is necessary to eliminate the excessive costs created by defensive medicine practices.
As with most aspects of life, increased competition increases quality and decreases costs. Yet, the current health care system makes it more difficult for competitors to find new and better ways to serve patients. Instead of codifying these competitive constraints, reforms should encourage greater competition among health care providers.
Systemic reforms such as these will address the broader problems of declining affordability and quality that plague the health care system. These reforms will also help more people afford health care services, whether those services are primary care visits, medical procedures, or pharmaceuticals. And, with greater affordability, the need for PAPs will diminish.
The sheer size of PAPs is an indication that the U.S. health care sector is plagued with an affordability problem that is neither unique to, nor caused by, any specific sector of the industry. The growing lack of affordability is caused by systemic problems that require systemic reforms.