• What makes the US health care system so expensive – Drugs

    If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Each of these pieces is going to discuss one of the components of unexpected spending that accounts for why our system is so expensive.

    Remember, these posts are going to follow a common theme.  I am going to highlight how the United States is spending more than you’d expect given our wealth.  Much of this comes from the McKinsey & Company study, Accounting for the cost of health care in the United States.

    You knew I had to get around to this eventually.  Who hasn’t tried to blame the high cost of health care on pharmaceuticals?  There is, of course, some truth to that claim; but anyone who hoped to find that pharma is the big bad boss here is going to be disappointed.

    Yes, the United States spends more for its pharmaceuticals than you would expect given our wealth.

    We spent more to the tune of about $98 billion in 2006.  Most of that was for drugs used on an outpatient basis.  Ironically enough, people in the US actually used about 10% fewer drugs than people in the other countries.  The problem is that our drugs, on the whole, cost about 50% more.  For name brand pharmaceuticals, we pay about 77% more.

    Why?  Some will say that it’s because we’re wealthier and need to subsidize for the rest of the world.  But even if we paid more based on our relative wealth, it would come to about a 30% premium, not the 77% we do pay.  Some will say that it’s because we in the US subsidize the massive research and development for drugs.  But the entire bill for R&D for the pharmaceutical industry was less than $50 billion in 2006, far less than the “extra” we paid for drugs.  Some will say it’s because we are subsidizing massive marketing in the US, which might be upwards of $40 billion in 2006.  Again, far less than the “extra” amount.

    Adding to this, we also tend to be early adopters of new drugs, which does raise our costs somewhat.  Drugs are approved about two years sooner in the US than in other countries, and we like to take them immediately.  Analysts say this makes the “average” pill taken in the US in 2006 about 118% more expensive than the “average” pill taken in other countries.

    So to recap, although we actually take fewer drugs than people in other countries, we favor more expensive drugs, and we also pay more for the same drug.  Add in the fact that we may be subsidizing R&D and that we also subsidize drug prices for the rest of the world, and there goes about $100 billion.  This accounts for about 15% of our “extra” spending for health care.

    I will say this at the end of every one of these pieces.  None of this proves that this money is wasted or fraudently taken.  Nor am I saying that we shouldn’t spend more money than other countries.   But this is money that goes above what you’d expect us to spend based on our greater wealth.  We should at least be able to account for and explain this increased spending in some way.

    • Dr. Carroll:

      You wrote a previous post on the R&D investment story for new drugs that I found incredibly insightful. Can you reference it here for new readers?

      This was the one, as I recall, that pointed out how much of new R&D was focused not on truly life-changing drugs but ones that were easy to market to a drug-hungry populace willing to try something new just because it had a potential to make them feel better – but how much better in the grand scheme of things….


    • Aaron, some evidence exists to support the “new drug cost offset effect”. That is, although expensive, “new” drugs sometime pay for their own way by keeping people from receiving even more expensive inpatient and outpatient care. I have a paper forthcoming in the Southern Economic Journal if you would like to see it.

    • Dr. Carroll:

      You also had a nice series of posts that argued that in most cases US citizens were really no less healthy than our peers in other countries.

      Do you think thats because we take more drugs than anyone else? It might seem to argue that we shouldn’t need to take as many drugs as we already do.

      I don’t know how to ask this question diplomatically… is our system biased toward keeping our senior citizens alive much longer – partly because of these wonder drugs – only to feed more patients in to these expensive outpatient and inpatient services? Sorry… that was difficult to ask. Are there any statistics on which ages are the most frequent visitors to these wards? Certainly, at some point, the most frequent patient is the old patient – parts wear out.


    • @Dale – I will look for what you’re talking about… And, no. I don’t think we’re more committed to keeping the elderly alive.

      @Rex – yes, I’d love to see it!

    • It would be incredibly useful to standardize on a protocol where patients are given a list of possible drugs for their condition, ordered by price (low to high) and encouraged to start with the cheap stuff and move to the expensive stuff. If you’re one of the lucky 20% that an old, inexpensive drug works for, you’ll never know it if your doctor immediately prescribes the new, expensive drug that effectively treats 95% of the population.

      A lot of people are spending extra for their drugs because they aren’t aware that older drugs will work just fine for them. Their doctors just never gave them the choice.

    • Does the cost of R&D stated here include the costs of getting a drug approved by the FDA?

    • This is a scandal. We spend a percentage of our GDP (16%) that is neraly twice as large as most other developed nations. Medications in Western Europe, Canada, Mexico, countries we have no more reason to subsidize cost 1/3 or 1/2 of ours, even if they are produced in the same lab in New Jersey.
      Our politicians, even the ones who have an MD behind their name (Ron and Ran Paul) can debate the Medicare, Medicaid problems without addressing the diffrencial in medication costs.
      There are only 2 countries in the world where pharmaceutical ads are authorized: ours and New Zealand…
      And most R & D goes to the smallest possible change of the formula that will still allow it to stay away from Generics competition.
      Our lives are managed by lobbyists. There is no other sustification to the scham we are victims of…

    • The staggering cost of drugs is a huge setback, not only here, but in developing countries that need the drugs most. But there is a way to create quality drugs in a cost effective, time efficient manner. To learn more about spreading the meds, visit https://www.facebook.com/HealthWoWealth

    • Do you have a hypothesis that might explain why only 22-38% of the variance in pharmaceutical expenditure is attributable to wealth whereas it is much higher for other areas of expenditure (at least that I have read so far in the previous posts)?