The chicken or the egg
New study finds high prescription drug costs are not driving up U.S. healthcare costs
SAN FRANCISCO—According to a new report released today by the Pacific Research Institute, a free-market think tank, there might be a question of “Which came first, the chicken or the egg?” when it comes to prescription drug costs and their effect on increasing healthcare costs. In PRI’s view, a more realistic evaluation of U.S. prescription drug prices is that high drug prices are not actually driving up healthcare costs overall, but rather reflect the higher U.S. healthcare costs compared to the rest of the world.
“It’s a common misperception that expensive prescription drug costs are driving up America’s healthcare costs overall,” said Dr. Wayne Winegarden, PRI senior fellow in business and economics, and the study’s author. “Our new study finds that drug price growth is actually not driving the growth in healthcare costs at all. Reforms to reduce complexity and increase transparency in drug pricing could go a long way to help consumers make informed choices and reduce prescription drug costs.”
Winegarden notes in the study that it is commonly assumed that drug prices are the primary cause of America’s healthcare affordability problem. This is due to the current overly complex pricing system. Most evaluations, he argues, focus incorrectly on the list prices of the drugs. However, this is a distorted view as these vary significantly from the net prices, or the prices consumers pay following all discounts and negotiated payments.
Among the other key points in the report, titled “U.S. Pharmaceutical Pricing in Context,” are:
- Since 1969, healthcare inflation has outpaced drug price inflation. More recently, drug price inflation has increased, likely driven by hospital drug prices and the increase in new, novel medications. Typically, drug prices rise at a faster rate when there are more innovations.
- Total expenditures on pharmaceuticals relative to overall healthcare expenditures have risen and fallen in an unrelated matter. This reportedly shows that increases in drug prices are not driving increases in healthcare costs.
- An apples-to-apples comparison of U.S. drug prices with those in other countries, adjusted for higher overall medical price inflation, shows that higher U.S. drug prices simply reflect higher overall domestic medical prices.
- The current drug pricing process includes “perverse incentives” that drive up costs. Reforms to simplify this process would theoretically enable list prices to reflect transaction costs more accurately.
PRI also points out in the report that hospitals are reimbursed for the price paid for drugs under Medicare Part B. Reforms to provide reimbursement based on the value of the drug, not the cost, would help drive down costs and increase information available for doctors, pharmacists and patients.