From PRI’s Right by the Bay: Big Pharma Is Not Gouging Americans nor Driving Up Healthcare Costs

Sen. Sanders and President Trump are reading from the same playbook. They are trying to address a real problem – the U.S. spends way too much on healthcare – but their playbook misdiagnoses the causes. Consequently, their cures will only worsen the problem.

Whether it is Sanders vilifying pharmaceutical companies or Trump’s emphasis on imposing price controls, they both allege that drug spending is a primary driver of the nation’s rising healthcare costs. Even a cursory look at the data demonstrates their focus is misplaced.

Let’s start with the national health expenditure data that shows the U.S. currently spends around $5 trillion annually, or $15,000 per person, on healthcare. This is a gargantuan amount. Prescription drug spending accounts for 9.2 percent of these costs.

At a bit over 9 percent, prescription drugs’ share of expenditures are around the long-term average. They are also below their share of expenditures back in 2010 (9.8 percent). In other words, total healthcare spending has been growing faster than total spending on prescription drugs since 2010. Since the growth in prescription drug spending is slower than overall healthcare spending, it is not driving the healthcare affordability problem.

But what about those excessive profits that riles up Sanders? If the industry is earning excess profits, even if it is not driving the problem, shouldn’t policymakers do something? An analysis by the Economist demonstrates that these accusations are meritless even assuming that policymakers should worry about companies earning excess profits.

The analysis looked at the financial performance of for-profit healthcare companies including biotechnology, pharmaceuticals, medical equipment, and healthcare services (i.e., hospitals, insurers, and pharmacy benefit managers).

The authors found that the entire healthcare industry earned $101 billion in excess profits. Of these excess profits, pharmaceutical and biotechnology companies earned $10 billion. In other words, the much-maligned biopharmaceutical industry earns a small share of the measured excess profits.

More important, as the Economist noted, “in the context of American health-care overspending” these excess profits are “a drop in a bucket.” More telling “the bulk of the rents is captured instead by providers of health-care services such as hospitals and the system’s true money-makers: insurers, pharmacy-benefit managers and other middlemen taking advantage of its opacity.”

Thus, based on Sanders’ metric of vilifying profits, reforms should focus on improving the transparency and incentives of the drug pricing market. These reforms include

• Eliminating the disincentives that enable pharmacy benefit managers to run up the costs of medicines
• Reforming the current drug rebate system including mandating that patients benefit from all rebates at the pharmacy counter, and
• Reining in the out-of-control 340B rebate program that subsidizes the profits of hospitals at the expense of higher drug costs for everyone else.

Both the NHE data and excess profit analysis also demonstrate a larger reality. While focusing on the costs of prescription drugs may be politically convenient, these costs are not driving the nation’s healthcare affordability problems.

These excessive costs are driven by an illogical healthcare system that suffers from direct socialization of nearly one-half of the healthcare market, government overregulation of the unsocialized parts, and a third-party payer system that isolates patients from their own healthcare decisions. Ultimately, addressing the excessive healthcare spending requires reforms that directly address these core problems.

Dr. Wayne Winegarden is the director of the Center for Medical Economics and Innovation at the Pacific Research Institute.