The Goal: cut the cost of US healthcare in half while achieving universal coverage and excellent quality of care without the heavy hand of big-time taxes, regulations, and bureaucracy. Hah! Yeah, I know. But gotta try.

The Situation: As a percentage of GDP, the US spends about twice as much on healthcare as other developed countries. This is a problem. See Part I of this series for details. For those who say healthcare is not a basic right, that means some people should be denied treatment, even if they die as a result.  That’s fine. This post is not for you.

What’s driving the high cost of healthcare in the US?  One way to approach this question is to focus on expenditure categories where the US outspends other developed countries. These would be outpatient services, pharmaceuticals, and healthcare administration, which combined account for almost two-thirds of overall healthcare spending in the US, compared to just half of healthcare spending in other developed countries.  Last post was about outpatient services, specifically how reimbursement rates and physician profit-sharing arrangements contribute to the cost of outpatient care in the US. This post will address the cost of pharmaceuticals,

A recent JAMA study ( Papanicolas et al, 2018) found that annual per capita spending on pharmaceuticals in the US was $1443, compared to an average of $680 for ten other developed countries - a difference of $763 a year. That's about 15% of the overall excess healthcare spending in the US, "excess" defined as the amount the US spends above what the other countries spend, on average.* For comparison, US outpatient services account for about half of excess healthcare spending. 

However, this "excess" is mostly illusory, because US consumers are subsidizing cheap drugs elsewhere.  In other words, the governments of other countries are able to negotiate lower drug prices, because pharmaceutical companies charge more in the US. Our high prices also pay for research and development of new drugs, in which the US leads the world. Maybe ways could be found to squeeze Big Pharma a little without undermining new drug R&D, but we're only talking a few hundred dollars a year in per capita savings. Not much when you consider the goal is to cut US healthcare spending in half, which would take almost $5000 in cuts.

Next: Administration and the cost of equipment: the case of Japan

*Note: I calculated "excess" spending as the additional US spending for this particular spending category, divided by the mean difference in all healthcare spending between the US and the eleven other countries. So if, on average, the other countries paid $100 less per capita on healthcare than the US, including $15 less on drugs,  spending on drugs would therefore constitute 15% of the overall "excess" healthcare spending in the US, compared to other countries.

Reference:

Papanicolas I, Woskie LR, Jha AK. Health Care Spending in the United States and Other High-Income Countries. JAMA. 2018;319(10):1024–1039. doi:10.1001/jama.2018.1150