• Do you really care about spending?

    Every time I offer a way to reduce health car spending that doesn’t involve cost-shifting, someone argues that if we spend less, the quality of health care in the US will decline. Let’s just ignore the fact that our quality is pretty crappy for what we’re spending already, implying that other countries have already figured out how to spend less and maintain, if not improve, quality. Let’s just run with this sentiment.

    If you believe that spending less in a sector will lead to less quality, then you have to believe that the current spending is justified. Sometimes, I’m baffled by this belief. For example, let’s take pharmaceuticals.

    Now before you jump to your ideologically-primed conclusion, I’m going to ask you to take a deep breath. I’m going to ask you to clear your mind and just absorb the chart. Then, let’s talk about it:


    This is a comparison of the drug prices for the 30 most commonly prescribed drugs in the world. As you can see, people in the US pay far more for those drugs than any other country. We pay twice as much for those drugs, on average, as the UK, Australia, the Netherlands, France, and New Zealand.

    Think about that. The drugs don’t work any better here. The molecules in them are no different. You can’t argue this is about choice or freedom or formularies, since this is a comparison of the same drugs in each country. We just pay more for them. A lot more.

    One argument at this point are that we have to pay more so that other countries, which are not as rich as we are, can pay less. Is that your argument? Are you feeling rich right now? Is the country? Moreover, if you feel this way, why not just increase foreign aid for the purchase of drugs and stop making people accessing the health care system pay for foreign aid.

    Another argument is that we in the US are so rich, we should subsidize research for new drugs* by paying higher prices. Is that you argument? See above about being “rich”. Again, if you feel this way, why not raise our taxes and pay pharmaceutical companies to do research and stop making people accessing the health care system pay for business investment.

    If we feel the need to support the pharmaceutical industry and the rest of the world, that’s fine. Vote to send money overseas and vote to give money to drug companies. This is America, and that’s your right. But why – in a “free market” – are we paying so much more than everyone else in the world for the same exact pill?

    Do you really care about health care spending? Then fix this. Or, go ahead and justify it. Tell the American people that they are so rich, their economy so robust, that their drugs need to be “taxed” for foreign aid and investment in big companies.

    *Not to mention that if you look at the list of most commonly prescribed drugs, many are me-too drugs, did not require significant research, and don’t need your subsidization. But that’s an argument for another day.

    • I am all for cutting costs. The post seems to be an argument for price controls in drugs. Drugs are still a small part (about 10%) of medical spending. If price controls are good for drugs they should be good for other medical spending. But price controls are a pretty heavy handed way to control costs I would rather see us first in drugs push generics harder to people on Gov healthcare and refuse to pay for drugs that have not shown large clear net benefits and try making is easier to get licensed to practice medicine before we jump to price controls.

      Monopsony seems to lower healthcare spending and seems to be the main reason that medical care is cheaper in the other countries in the chart above, but it seems to be a one time gain. I would like to see one of the USA states try single payer and perhaps another state try Gov provided healthcare. I would also like to see my idea tried that is state provided health insurance with a deductible equal to a persons last years adjusted income minus the poverty rate.

      • I don’t believe Aaron is calling for price controls and I don’t think the other countries in the chart impose price controls in the conventional sense. However, Medicare and Medicaid could bargain over drug prices in addition to your suggestions of pushing generics and not paying for drugs of doubtful benefits.

    • I’m not trying to be a troll, I just honestly don’t know. What keeps the costs in the U.S. high? It must be something more than just “The drug companies set them high” since they don’t (appear to) do so in the rest of the world.

      • Part of the difference in pricing for the same drugs is in the US the manufacturer sets the price. In the EU, for example, as part of the drug approval process the Helath Authority (EMA) sets the selling price. In both cases there are many factors that go into setting the selling price. In the US a portion of that is what Medicare/Medicade will reimburse, I am not sure of the factors that go into the EMA setting the price.

    • But couldn’t that price gap have something to do with formularies? You write that it doesn’t, but if formularies are tighter in other countries as a rule (I don’t know if that’s true) then wouldn’t that allow them to pay less on average for the same drugs? A good test might be to line up what the VA pays versus what the public systems in those countries pay.

      • I’m saying this isn’t about formularies in the sense that some will argue that OVERALL we pay more for drugs because we have access to better ones. This isn’t a comparison of formularies, it’s a comparison of prices for the same drugs.

        Also, see http://theincidentaleconomist.com/wordpress/what-if-medicares-drug-benefit-was-more-like-the-vas/

        • Aaron, I’m sure you have answered this before, so hopefully you can just point to an earlier post.

          I understand the point that this is for the same 30 drugs across multiple countries. I don’t understand what makes (is keeping) the prices in the U.S. higher than elsewhere? For example, what stops a hospital from bulk ordering from an overseas supplier? Or a large retail pharmacy doing something similar?


          • I believe it’s a question of legality. I actually just read something saying that allowing importation of drugs would reduce costs, but I can’t remember where it was, sorry. Here is a link about the FDA opposing allowing drug importations http://thehill.com/homenews/senate/71307-fda-opposes-senate-drug-importation-amendmen. It indirectly supports my belief.

            • Thanks.

              It seems like that would be a simple cost savings right there (w/o requiring any legislation). If the FDA has approved the drug, it could/should allow importing it. Anything else seems like no more than a regulatory windfall for pharmaceutical companies. (And it is clear that multinational corporations are very good at regulatory arbitrage.)

              Of course, it might not be much of a savings in the grand scheme of things. It does seem like the kind of regulation that encourages people to think that getting government out of the picture would help.

    • There is a large faction that argues against spending cuts that don’t involve cost shifting (as it will hurt care), then argues for cost shifting (because we can’t afford to pay so much).

    • It is my understanding that foreign countries do more to regulate the prices they pay for drugs, whether price controls or negotiated prices prevail, I don’t know.

      Either way, at the current prices, the drug companies make a certain amount of profit. They use most of these profits to do beneficial things for us (like develop new drugs), and they use some to compensate their employees (like CEOs). If we want to lower the prices we pay, we’re going to lower their profits, and, therefore, decrease research.

      Is that what you want to do?

    • “The drugs don’t work any better here.”

      Is this necessarily true? If drug prices were the only inflated cost in the American health system, it would shift spending out of drugs to other areas that are more cost-effective than inflated drug treatments. Obviously, this is a statement about an American health system that doesn’t exist — costs are inflated across the board.

      However, if we were to reduce drug prices by giving the government a stronger hand in negotiations, banning co-pay assistance, etc wouldn’t this make drug treatments disproportionately cost-effective in our otherwise inefficient system? Would people be more likely to be pushed into expensive therapies than proven generic or non-pharmaceutical treatments?

      I like the point your making and employ it often, but I’m curious as to the likely impact of getting drug expenditures under control in the absence of system-wide cost reforms.

      On another note, I wonder how this plot looks for 2010/2011. Drug spending has not increased as much as predicted (see Part D coming in under projections). Would presumably level the playing field a bit or are drug companies increasing American prices even more to maintain profits without new products?

    • Many would argue that the price in the US is higher due to regulations and expenses, that are unique to the the US, to bring the drug to market. Might this be true, in this example?
      Does advertising play a role? Do some countries not allow advertising?

    • BTW The states get in the way of much healthcare in the USA (they license Doctors, Nurses and Insurance companies) and North Dakota and Utah for example have excellent healthcare and not so high spending. So maybe we should look at individual states as we compare to those countries but we do not. Hmmm why would that be?

    • I just noticed the cutting USA drug prices to that of New Zealand would only cut medical spending by about 7%.

    • As someone who spent 30 years in drug development in both the US and in Europe, a few points:

      1. The cost of bringing a “me-too” drug to market is almost identical to the cost of bringing an innovative product to market. Pharmaceutical companies believe that the RISK of developing a me-too product is lower than that of an innovative product. Personally, I am not so sure that is true. Usually the preclinical models of safety and efficacy provide useful information on the drug’s likelihood of success before huge investments are made. The comparable models that would tell you if you could differentiate the product in the market from existing therapies are much less robust.

      2. I think the accurate way to view the price differentials between the US and other developed countries is that the US is subsidizing drug R&D for the rest of the world. It is fair to ask if we want to do this or not.

      3. The price setting mechanism in most countries is that some governmental agency or other sets a price based on whatever factors they deem important. The companies can either take it or leave it. Generally, if the set price is above the direct manufacturing costs, they take it. There have been isolated cases where companies say “no thanks, we won’t sell this in your country” because of a too-low price. With the rise of parallel imports in Europe, this is more likely to occur. Note that there is NOT an EU-wide price structure. Approvals are EU-wide, but reimbursement is country by country.

      4. Paying a lower price in the US, and then having the government fund R&D directly sounds good, but would be very challenging to implement in practice. Decisions on which programs to fund, when to give up on a project, etc. are excruciatingly difficult to make in an environment where 19 out of 20 projects fail. Trying to do this in a committee with public oversight, special-interest lobbying, and so forth would be very tough. Not impossible, the mechanisms exist to some extent in the NIH and the NSF, but really, really hard.

    • Quite a compelling question, and graphic. I believe you leave out critical components in this issue though. These US prices do not include the rebates paid by manufacturers to insurers, whereas the European comparators in essence do (at least for the most part). Furthermore, normalizing for cost of living factors using an accepted method like PPP, purchase price parity, would also remove further levels of pricing difference, in some cases making the US prices cheaper than elsewhere. I don’t disagree that in some cases US prices are higher than elsewhere, and as this is data my company generates, I feel reasonably able to comment on appropriate interpretation. This anaylsis doesn’t address normalization for known causes of variance. We don’t need to go to policy, culture or philosophy yet, we need to look at facts and economics first. It is exceedingly difficult to get to true like-for-like assessments in this area and it’s not surprising that there are questions, but the conclusions go too far and are misleading in my view.