Myths and Realities of the Health Care Affordability Problem
According to the five-second rule, you can still eat your food that has fallen on the floor, so long as you picked it up within five seconds. Only, this common perception is bad advice. In reality, if a person eats food that has fallen on a dirty floor, he risks getting sick because it only takes milliseconds for bacteria to contaminate it. The five-second rule is a myth.
The myth of the five-second rule exemplifies how common perceptions can often lead to the wrong actions. With respect to health care, it is commonly perceived that expenditures on drugs are driving the health care affordability problem. The reality is more complex.
The perception that expenditures on prescription drugs are driving national health care expenditures seemed to be correct for 2014 and 2015. During these years, the growth rate for prescription drug expenditures were more than double the growth rate in overall national health care expenditures. And, based on these two years, it seemed as if the ills of the health care system could be solved by simply focusing on the costs of prescription drugs. Then, the latest National Health Expenditure data were released.
The latest data showed that total national health expenditures continued to grow faster than people’s incomes – rising 4.3 percent in 2016. But, in contrast to the previous two years, the growth in expenditures on prescription drugs decelerated, growing a mere 1.3 percent. Clearly, prescription drugs could not have been the driver of health care spending in 2016 since its growth was less than one-third the growth rate for total health care expenditures.
These data exemplify the reality that spending on any single component of the health care sector fluctuates (sometimes widely) from year to year. There are many reasons why.
For instance, with respect to the changing growth rates in pharmaceutical expenditures, there were 45 novel drug approvals in 2015 that are, by definition, very expensive to develop. In 2016, the number of cutting edge drug approvals declined significantly to 22. With fewer new drugs released, it is not surprising that the growth rate in pharmaceutical expenditures was also lower in 2016 compared to 2015.
The lesson from these results is that volatile short-term data are no basis for making long-term policy decisions. Instead, long-term policy should be based on the underlying, long-term, trends.
Looking at the long-term trends, pharmaceuticals’ share of total national health care expenditures has averaged around 9.8 percent since 2000. And, true to this trend, total pharmaceutical expenditures in 2016 accounted for 9.8 percent of total national health care expenditures. Going back further, total pharmaceutical expenditures were 9.9 percent of total national health care expenditures as of 1960. Thus, taking a long-term view, pharmaceuticals current share of total health care expenditures is quite typical.
From an international perspective, data from the Organization for Economic Cooperation and Development, or OECD, confirm that total pharmaceutical spending as a percentage of total health care spending is lower in the U.S. than the average for the 30 OECD nations – countries that include Canada, France, the U.K., and Japan.
The excessive growth in total health care expenditures is a long-term problem, but pharmaceutical spending has not been growing faster than total health care spending over the long term. Thus, the perception that pharmaceutical spending is driving the affordability problem is misplaced. Neither pharmaceuticals, nor any other individual component of the health care system, is driving the affordability problem.
Instead, as I have argued here, the health care affordability problem is a systemic problem that requires systemic reforms. These reforms should: remove disincentives, such as the problems associated with defensive medicine that arise from lawsuit abuse; increase competition in the practice of medicine; eliminate the government-imposed distortions on the health insurance markets; and, simplify drug pricing. Further, instead of relying on the overly-complicated government health assistance programs to help those in need, the government should move toward a simpler income support program that empowers patients not bureaucracies.
Reforms that address the root causes of the affordability problem will improve both the quality and the affordability of health care in the U.S. On the other hand, just as with the five-second rule, decisions based on ill-informed perceptions rarely lead to good outcomes.