To Promote Affordability President Trump Should Empower Competition Not Socialize Healthcare
Politicians continue perpetuating the myth that drug price controls are the necessary cure for the country’s healthcare affordability problems. Whether it is Speaker Pelosi’s “The Lower Drug Costs Now Act”, or President Trump’s Most Favored Nation (MFN) and Drug Importation Executive Orders, these policies are destined to fail.
Undoubtedly, there are problems with the drug pricing system that harms patients, and reforms that fix these problems are urgently needed. But, adopting the ill-fated price controls that are implemented in other industrialized countries will create new problems for the U.S. while failing to create a more affordable healthcare system.
In the case of President Trump, instead of openly admitting that he is imposing price controls, he would tie U.S. drug prices for Medicare Part B and D drugs to the price-controlled prices in a select list of MFN countries that include Canada, the U.K., and the EU and, consequently, adopt price controls by stealth. The only difference is that the controlled prices are set by the bureaucrats in other countries rather than the U.S. government.
The chart below demonstrates one of the fundamental flaws in this logic. It presents each country’s pharmaceutical spending as a percentage of total healthcare spending based on the data compiled by the Organization for Economic Co-operation and Development (OECD).
According to the OECD calculations as of 2018 (the latest full dataset available), pharmaceutical expenditures comprise approximately 15.8% of the total healthcare expenditures in the average OECD country. In the U.S., pharmaceutical expenditures comprise a much smaller share of total healthcare expenditures, about 11.6%. Just as important, U.S. pharmaceutical expenditures have consistently been a smaller share of total healthcare expenditures compared to the OECD countries since 1987 (when the OECD data for the U.S. begins).
If spending on drugs is higher in the U.S. compared to the other OECD countries, which it is, but U.S. spending on drugs is a smaller share of total healthcare expenditures, then it has to be the case that total healthcare spending in the U.S. is significantly more than total healthcare spending in these comparator OECD countries. And, this is true too.
On a per capita basis, U.S. healthcare spending is the highest among the OECD countries, and is 2.6 times higher than the average OECD country. U.S. spending on pharmaceutical products is also the highest among the OECD countries, but is only 2.1 times higher than the average OECD country.
Therefore, while patients in the U.S. spend more on drugs than patients in other countries, they spend even more money on all other medical services compared to patients in other countries. Put differently, prescription drug spending cannot be the prime driver of high healthcare costs in the U.S. when spending in the U.S. on all other healthcare services are even more expensive than the other OECD countries.
Take physician compensation as an example. Average physician earnings in the U.S. in 2019 was $313,000. These “costs” are more than double the average costs of physicians in countries where the government is the sole or the main provider of healthcare services. For example, physicians earn $163,000 in Germany, $130,000 in Canada, and $138,000 in the U.K..
Even though physicians in the U.S. earn more than physicians in these countries, it is a terrible idea to link the salaries of U.S. doctors to the salaries of doctors in these countries. If we pursued such a hairbrained policy, the U.S. would create the same healthcare problems that plague these countries.
For instance, single payer countries like the U.K., Canada, and Germany face severe shortages of doctors and other medical professionals. The U.K., even before the Covid-19 pandemic, had “10,000 medical vacancies” they could not fill. Such shortages are the inevitable result of price controls.
Combing these doctor shortages with the Covid-19 pandemic, “NHS bosses have warned that waiting lists in England alone could reach 10 million by the winter”. Under Canada’s single payer system, where there is no private coverage for anything considered “medically necessary”, the average wait time from seeing a primary care doctor to getting treatment by a specialist last year was just over five months.
Doctor shortages and long waiting lists create significant health risks for patients who will be unable to receive necessary medical services in a timely fashion. A similar problem of shortages and access issues afflict patient access to drugs across Europe and Canada.
Patients in the U.S. have access to nearly 90% of all new medicines introduced over the last decade, which is greater access than any other country in the world. Patients in Germany, the country with the next highest drug availability rate, could only access a bit more than 60%. Canadians have access to less than half. Drug price controls create access issues for the same reason that physician price controls create doctor shortages. And, they pose a similar threat to patient health.
These data illustrate two important realities when comparing healthcare expenses in the U.S. to other countries.
First, whether it is drug prices or physician salaries, other industrialized countries are imposing draconian government price controls that artificially depress healthcare costs. As with any price control, these policies come with high costs that include shortages and access issues that worsen healthcare outcomes for patients. Tying prices in the U.S. to the prices in these countries will import these problems into the U.S. healthcare system.
Second, there are many inefficiencies about the U.S. healthcare system that are creating unacceptable affordability problems. With respect to drugs, reforms are needed to fix the drug pricing system and remove the obstacles preventing biosimilar competition from driving down the prices for the expensive biologic medicines. For the broader healthcare system, reforms should encourage greater entrepreneurship in the delivery of healthcare services, empower patients to control the healthcare services they receive, and fix insurance markets to ensure that insurers are effectively mitigating the financial risks.
Unlike importing price controls, these reforms target the inefficiencies driving up healthcare costs in the U.S. without importing the shortages and reduced access that inevitably result from nationalized healthcare. The result will be a more affordable healthcare system without the problems price controls inevitably create.
I am a Senior Fellow in Business and Economics at the Pacific Research Institute and the Director of PRI’s Center for Medical Economics and Innovation. My research explores the connection between macroeconomic policies and economic outcomes, with a focus on the health care and energy industries. I have over 25 years of experience advising Fortune 500 companies, medium and small businesses, and trade associations. I received my Ph.D. in economics from George Mason University.