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The Rough Notes Company Inc.



June 26
10:23 2018

Public Policy Analysis & Opinion

Researchers explore a prime driver of U.S. healthcare financial losses

Insurance mechanisms transfer and spread the risk of financial loss across the largest population possible. Too often, policymakers insist on dismissing personal or institutional financial losses as mere “spending.”

Of the ten countries studied by researchers, the United States applies the  lowest level of public interest oversight  to pharmaceutical pricing.

According to a recent study published by The Commonwealth Fund, U.S. healthcare spending, per capita and as a percent of GDP, “dwarfs that of any other high-income country, and longitudinal trends reveal that the gap in spending between the United States and the rest of the world continues to grow.”

The purpose of the study was “to compare drug spending levels and trends in the U.S. and nine other high-income countries—Australia, Canada, France, Germany, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom; consider potential explanations for higher U.S. spending; and explore patients’ exposure to pharmaceutical costs.”

One category of financial loss makes the United States stand out among wealthy industrialized nations: money spent on prescription pharmaceuticals. The cost of prescription drugs is a primary driver of the nation’s healthcare budget.

The Commonwealth Fund researchers note that, until the 1990s, the U.S. did not hold a leadership position in prescription pharmaceutical losses. “But in the 1990s and early 2000s, spending on prescription medications grew much more rapidly in the U.S. than in other nations. The mid-1990s saw a decade of rapid pharmaceutical growth in all countries, as annual numbers of FDA-approved drugs hit all-time highs, and sales of hypertensive and cancer drugs boomed.”

The researchers explain that the increase in the U.S. spending level was partly a result of the   expansion of prescription drug coverage through public policy. This expansion included changes to drug coverage by Medicaid and the creation of the Children’s Health Insurance Program, as well as amendments to the regulation of the standardized Medicare supplement plans. The researchers did not mention the Clinton Administration’s approval of advertising prescription drugs on television and radio.

If the financial losses tied to prescription drugs solely reflected expansion in coverage, we would expect to see a large spike in U.S. pharmaceutical costs after the launch of Medicare Part D under George W. Bush. This did not happen. The Common- wealth Fund researchers explain: “In the mid-2000s, spending growth slowed in all 10 countries, as fewer blockbuster drugs gained approval and many top-selling drugs, like Lipitor, came off patent.”

In the United States, prescription drug costs expanded rapidly in 2014-2015. Some observers will point to the expansion of drug coverage under the Affordable Care Act to explain this increase. The Commonwealth Fund researchers acknowledge a role for the ACA, but they point to other cost drivers.

“This growth, like that experienced in the 1990s, was principally because of the introduction of several expensive specialty drugs to treat hepatitis C, cystic fibrosis, and other conditions,” according to the report.

The report appears to include in its data the prescription drug losses incurred by the Defense Department and the Veterans Administration, which would have spiked in response to injuries suffered by American troops in the wars in Iraq and Afghanistan.

Four factors

The Commonwealth Fund researchers suggest some reasons why U.S. prescription drug costs outpace those in the rest of the industrialized world. “Four possible factors determine a country’s spending on pharmaceuticals: country population and volume of drugs consumed, drug utilization per person, type and mix of drugs consumed (e.g., generics versus brand-name drugs), and prices at which drugs are sold.”

The researchers set aside population size as a definitive means to explain the financial losses from prescription drugs experienced in the U.S., according to the report. “While the United States has the largest population and the greatest absolute prescription drug spending as a country, its spending per capita … is still significantly higher than that of other countries.”

When the researchers controlled for population size through a per capita computation, they found that Americans lost $1,000 per person, and spending was 30% to 190% higher than in the other nine countries.

The researchers found that Americans were not using more prescription drugs compared with similar national economies but rather that Americans just pay more, through their private or public insurers or out of their pockets.

Some observers speculate that Americans just use more prescription drugs than people in other countries. They say that American doctors play an expensive game of Candy Store. Patients whine, and the docs take out their prescription pads so they won’t get sued. In other countries, both patients and doctors behave in a more disciplined manner.

That explanation makes for a pretty good story, but the statistics do not support it.

Unlike with the per capita financial loss from prescription drugs, the U.S. is not an outlier with respect to the volume of drugs consumed: “Forty-seven percent to 60% of adults in all countries report taking one or more prescription drugs regularly, and while the U.S. is at the upper end of this range (59%), the differences may not be statistically significant.”

Generics and on-patent drugs

The Commonwealth Fund researchers also examined the use of on-patent medicines and generics. “In the U.S., generics make up 84 percent of the total pharmaceutical market (in terms of utilization, not spending), a larger share than in all the other countries except for the U.K.” The dominance of generic drugs in the pharmaceutical market will surprise many observers and advocates.

Many dismiss the U.S.’s high losses from prescription drugs as simply an example of the overuse of on-patent drugs. Certainly on-patent (i.e., monopoly) products play an important role in the price inflation that is unique to the United States. The researchers observe: “In general, the U.S. allows wider latitude for monopoly pricing of brand-name drugs than other countries are willing to accept.”

It is not realistic to counter the cost of on-patent drugs by restricting or prohibiting their use. Remember, generics already make up 84% of the market for prescription drugs. Americans and the American economy continue to suffer increasing financial losses despite the widespread use of generic drugs.

Of the 10 countries studied by the researchers, the U.S. applies the lowest level of public interest oversight to pharmaceutical pricing. The researchers observe: “Many other countries employ centralized price negotiations, national formularies, and comparative and cost-effectiveness research for determining price ceilings.”

In addition, the American market does not exert consumer-based downward pressure on pharmaceutical pricing. The division of consumer demand among public and private insurers as well as uninsured individuals diminishes the power of the demand side of the pricing system.

In the U.S., only the Veterans Administration holds statutory authority to negotiate drug pricing with pharmaceutical companies.

During the debates on the ACA, legislative sponsors proposed a provision to allow Medicare to conduct price negotiations. During legislative horse trading, the Obama Administration negotiated away that provision as part of a package of concessions that purchased peace with the pharmaceutical lobby.

To other countries that depend on concepts like “fact” and “reason,” the U.S. system looks like madness.

Public trough

Advocates for the pharmaceutical sector argue that adopting the public interest oversight approaches that other wealthy countries use successfully would close off the sector’s access to research funds. These advocates never mention the massive subsidies that Big Pharma receives from the public.

Public subsidies begin with the public insurance entities that purchase prescription drugs. According to the Commonwealth Fund report, Medicare pays for “well over a quarter of prescription expenditures.” Add to that the prescriptions purchased by Medicaid and the Veterans Administration, as well as numerous state and local programs that provide public funding to targeted populations.

The pharmaceutical sector also receives public subsidies through payments from private insurers in the form of tax credits and deductions for plan sponsors. Also, American jurisprudence defines all insurance mechanisms as being imbued with the public interest (see German Alliance Insurance Company v. Barnes/Lewis [Kansas Insurance Commissioner], 1914).

Furthermore, pharmaceutical research relies on the American system of higher education. That system includes public institutions that are directly funded by tax dollars and public and private institutions that receive contributions from tax-exempt foundations or provide tax deductions to individual contributors.

In addition, the sector receives public subsidies in the form of the aforementioned monopolies under the patent system. This accounting of public subsidies does not even attempt to explore the sector’s funding from public grants and policing of the financial markets from which it receives additional funding.

The drug companies take more than enough from the public, the insurance sector, and public insurance mechanisms. The time has passed for Big Pharma to ask for additional public subsidies. The sector’s activity induces a sense of injustice, which brings to mind the criminal justice system described in the Old Testament—or maybe a shadowy forest in the medieval Balkans. The screams are terrifying, but the sound satisfies the sense of injustice, unless the screams are coming from your mouth.

Nervous lawyers

Yes, we have gone too far again. The legal department will get all nervous and sweaty. So, I need to reassure those in the legal teams, as well as our readership, that commentary often employs overstatement and satire.

No serious plans are in the works to capture, menace, or torment any pharmaceutical executives, their lobbyists, or any lickspittle public officials who do the bidding of the former two groups. I have not even thought about it … much. Not even the part where bees are released in Big Pharma executive dining rooms.

We need to apply insurance mechanisms to the financial losses incurred by Americans who seek medical care and treatment. Borrowing from the mathematical work of Blaise Pascal, Edmond Halley, and Richard Price, the civilized countries of the world make effective use of insurance mechanisms. The nations of Australia, Canada, France, Germany, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom do not represent a lunatic fringe. n

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.

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