Public health analysts often bemoan the fact that the US spends a lot on healthcare. Health spending accounts for 18% of GDP, while the rest of the developed world spends about 10%. But we get a lot of innovation for that spending. The US has more clinical trials than any other country. We have more patents. The US has the most Nobel laureates in physiology and medicine. Our research universities are the envy of the world. Our robust intellectual property laws mean that individuals and companies can profit from new drugs and devices.
In fact, some question whether we have too much innovation. “Me-too” drugs often take a newly approved medication and make minor modifications in order to qualify for a new patent. This can create competition and drive prices down, but it can also create confusion in the marketplace. Is the new drug better, worse, or indicated under different circumstances?
The cost of our healthcare spending is an enormous burden on American taxpayers and consumers, and there are a lot of perverse incentives. Since information can travel across borders quite easily, the US is easily the largest subsidizer of health care innovation in the world. It’s reasonable to debate whether this is fair. But that’s a different debate than whether or how to reorganize our health care system.
Source: Our World In Data
Currently, we have a hybrid health care system: partly market-based, partly public insurance, partly directly funded by the Federal Government. We allow drug-makers to set their own prices for a given product. Other countries often reject a new drug if their pharmacy boards don’t think the benefit justifies the price. That means the US sometimes gets expensive drugs that seem offer little added benefit. And the other countries can change their decision if – when the new drug is widely released – it turns out to make a big difference in health outcomes. Americans therefore end up spending way more on prescription drugs than anyone else, but we also take more new medications than anyone else.
This is the central dilemma in drug pricing policy: should we trade off innovation for lower prices? It’s an important question, as one in four Americans report trouble paying for their prescriptions, but important diseases – like pancreatic cancer – still don’t have effective cures. It’s a difficult conversation. But it’s a conversation worth having.
Douglas R. Tengdin, CFA