Friday, August 22, 2014
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If markets are so great, try one for Pharma and Medicare

In 2003 Gerard Anderson of Johns Hopkins University and Uwe Reinhardt from Princeton, together with two of their colleagues, published a study that concluded Americans pay health care costs that are as much as four times higher per person than other advanced countries. Just this week, the International Federation of Health Plans (IFHP), a global trade association of insurers, updated those findings by concluding that the disparity has even worsened, so Americans now pay even comparatively more. The question is, why are costs here so much higher?

If markets are so great, try one for Pharma and Medicare

In 2003 Gerard Anderson of Johns Hopkins University and Uwe Reinhardt from Princeton, together with two of their colleagues, published a study that concluded Americans pay health care costs that are as much as four times higher per person than other advanced countries.  Just this week, the International Federation of Health Plans (IFHP), a global trade association of insurers, updated those findings by concluding that the disparity has even worsened, so Americans now pay even comparatively more.  The question is, why are costs here so much higher?

Anderson and Reinhardt asked that question and answered it in the title of their 2003 paper: "It's the prices, stupid."  They first examined other plausible factors that could conceivably account for higher US health care costs.  These included suggestions that Americans are sicker or visit doctors and hospitals more often or have longer hospital stays.  All of these diversionary explanations, offered by apologists for our system, are bogus.  American hospital stays, for example, are shorter than those in Germany, while we visit physicians less often than Canadians.   Yet Germany's per capita health care cost is about half of what the US pays, while Canada's is 60% of ours.

So why are prices so much higher here?  Anderson told the Washington Post's Ezra Klein, “Other countries negotiate very aggressively with the providers and set rates that are much lower than we do.”  They do this either by the government setting prices, as in Britain and Canada, or by insurers aggressively negotiating with providers, as in Germany and Japan, while their governments reserve the right to set prices if the two sides fail to reach a satisfactory agreement.

In the US, by contrast, the pharmaceutical industry has been able to successfully prevent Medicare, the country's single largest drug payer, from negotiating prices.  The prospect of giving Medicare the same negotiating authority as its sister operation, Medicaid, frequently surfaces in policy debates.  It emerged again in 2009-10, during the struggles to enact Obamacare, but the president traded away the ability to negotiate drug prices, as well as other cost control options, in return for insuring 30 million more people.  The matter of giving Medicare bargaining rights on drug prices is again in the political air because of a growing recognition that if Medicare's costs continue growing at their current rate, they will destroy the federal budget.  Yet even Congressional Republicans, the fetishists of spending cuts and fiscal austerity, hesitate to let Medicare participate in the bargaining process, a central element of their sacred market.

But the answer that other countries constrain prices by negotiating aggressively just begs the question of why they do it and the US doesn't.  America fails to limit health care prices, even through a market, because of a pernicious aspect of the culture here.  As IFHP director Tom Sackville told the Post's Klein, "health is a business in the United States in quite a different way than it is elsewhere.  It’s very much something people make money out of...compared to Europe and elsewhere." 

The cultural value that sanctifies business in this country enables manufacturers to profit exorbitantly from the suffering of others.  Two of the five most profitable industries here are pharmaceuticals and medical devices.  The irony here is that in a country which sanctifies business markets, both industries make their profits because they are protected from market forces.  A market requires that its participants can seek the best deals by bargaining for the most favorable prices, buying at the time they choose, and acquiring the information to make a wise selection.  Yet people who need health care products and services often can't defer their purchases.  They also lack the repose, information and experience needed to weigh the alternatives.  In short, pharma makes its fortunes not by prospering in the market, but by avoiding it.

Sometimes the market can be an efficient method of improving society's well being.  It can act faster than government to eliminate dysfunctional forces and do so more thoroughly and ruthlessly than a government subject to bribery and democratic pressures.  Of course, a market is not infallible, as laissez faire ideologues maintain, because its reflexive pursuit of profits often eliminates large segments of people from the game.  Markets often ignore the needs of people without much purchasing power.  But the introduction of market operations into sectors that have been closed, protected or controlled by monopolies usually benefits the larger public.  More goods and services become available at fairer prices.

Those benefits will follow if an operating market allows Medicare as a drug payer to exert the bargaining power that comes from its purchasing volume.  More people will gain access to needed medications while steep price increases will be curtailed.  Markets can be a useful social phenomenon and the pharmaceutical industry should be subjected to its rigors.


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Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
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Check Up covers major health events in our region and offers everything from personal health advice to an expert look at health reform. Read about some of our bloggers here.

For Inquirer.com. Portions of this blog may also be found in the Inquirer's Sunday Health Section

Michael R. Cohen, R.Ph. President, Institute for Safe Medication Practices
Daniel R. Hoffman, Ph.D. President, Pharmaceutical Business Research Associates
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