The United States is unique. Proud citizens can point to its fight for independence leading to 1787’s Constitution––the world’s longest surviving written charter of government. Or they might celebrate the country’s outsized influence on global entertainment and pop culture. Surveys suggest that Americans value individualism, believe that hard work leads to success, and are more religious than citizens of other nations with similar wealth. Unfortunately, the country is unique in another way. It leads the world in health care costs. Even worse, paying nearly $11,000 per capita per year (over $3,000 more than second-place Switzerland) doesn’t deliver better outcomes. For decades, data has consistently shown that the average American is more likely to be overweight and have a pre-existing condition like diabetes or hypertension than their European or Asian counterparts. Research suggests this was a primary driver of the country’s high fatality rate from COVID-19––with the U.S. suffering almost 20% of the world’s fatalities despite having less than 5% of its population. Until recently, this also put the U.S. in the unenviable position of being a global leader in total fatalities.
Passed in 2010, the Affordable Care Act sought to rein in rising costs and increase the numbers of insured by requiring that citizens have health insurance while offering it at reduced rates to people with limited income. It also greatly expanded Medicaid, which provides government-backed health care coverage. Often called “Obamacare” by opponents––after then-President Barack Obama––the term was later adopted by its champions as well. Overall the cost of health insurance continues to outpace inflation although the rate has averaged below 5% a year since ACA’s passage. Still, many remain uninsured. Worse, prescription drug prices remain unchecked despite being one of the primary drivers of health costs. The Elijah E. Cummings Lower Drug Costs Now Act (H.R. 3) hopes to change that. What is it, how does it work, and what are its chances of becoming law?
All-You-Can-Eat Buffets
Competition drives down prices. If you live in a town with five different burger shops, they will each try to get your business. That competition forces them to run lean operations with relatively low profits in order to charge the least amount of money for the best burger. Similarly, when apartment rentals are scarce, landlords can raise rent while restricting units to the most desirable tenants. Even doctors in places where physicians are scarce charge more than in areas where they are prevalent. Generally speaking, health care has little competition. Someone suffering a heart attack isn’t going to check out a medical center’s Yelp reviews. They aren’t likely to haggle over the cost of the ambulance. Plus, the massive amount devoted to administration costs––including filling out all those insurance forms––is baked into the system.
In the U.S., most adults have private insurance through their employer. The costs they worry about most are the portion of monthly premiums not covered by their company along with deductibles and copays––the so-called “out-of-pocket” costs. If a doctor recommends a test, treatment, or medication, the patient likely worries mainly about whether or not it’s covered by insurance. They are less concerned with the price of the treatment itself than how much they have to pay out of pocket. There’s a perverse incentive once the deductible is met to actually use as much health care as possible––few people pay $20 for an all-you-can-eat buffet, then nibble on a small plate of salad.
This also applies to doctors and hospitals who get higher reimbursements for certain tests or medications––meaning they have a financial incentive to recommend them. That’s not to suggest that most health care professionals are lining their pockets at the expense of their patients. Rather, these perverse incentives along with the complexity of pricing and administration means that even if a patient is concerned about prices, shopping around for the best deal is nearly impossible. You can’t call and ask the price for bypass surgery the way you can research beauty salons to find the best price for highlights. Some doctors have gone “insurance free,” offering pay-as-you-go options with clear prices for services while concierge medicine allows patients more control over their care (and generally more available doctors) at a higher price. Elective surgeries that aren’t covered by insurance are subject to free-market competition. Overall, the price of elective procedures has increased at around the rate of inflation (and some have even dropped in price). Named after its late sponsor, The Elijah E. Cummings Lower Drug Costs Now Act could inject competition into patent-protected drug prices by tying them to the prices in certain other countries. It hopes to reduce the costs for the most prescribed drugs (between 50-125 of the top ones), while threatening massive financial levies to companies that don’t comply. The questions are: Will it work? And will the bill pass?
Rising Costs
University-level education is the only other aspect of American life that outpaced inflation at levels similar to that of health care. In the 1960s, the majority of patients and students (or their families) paid the entirety of their costs. Today, as with health care, education is heavily subsidized in the form of grants and federally backed-student loans. Just as patients rarely pay out of pocket for tests, many college students use loans and grants to cover not just tuition but books, housing, and food.
Although an American in their 30s is three times more likely to die than a European peer, parity between the two happens once someone reaches age 65. Many point to the near universal adoption of Medicare––the government-backed insurance offered to senior citizens as the primary reason for this. The downside is that much of the spending is devoted to the last year of a patient’s life––between 20 to 30% of the agency’s total expenditures depending on the year. So just as ACA sought to offer the same type of coverage for younger people that is enjoyed by their elders, The Elijah E. Cummings Lower Drug Costs Now Act seeks to provide lower-cost medications for them as well. Although prescription drugs for seniors are heavily subsidized, many still travel to countries with lower costs like Mexico and Canada. The bill seeks to lower drug prices by tying the rate manufacturers can charge to six other nations with historically lower costs: Australia, Canada, France, Germany, Japan, and the United Kingdom. A key provision would “require a drug’s price to be set between the lowest price in six high-income countries and 120 percent of the average price across those countries.” If a company refused to set their prices accordingly, the U.S. Health and Human Services Secretary could “impose prohibitive financial penalties on sales of a specific drug.”
While insurance companies, hospitals, and even individual doctors often negotiate with pharmaceutical companies (or their representatives), the government does not. The proposed law would bring them into negotiations. By linking U.S. pharmaceutical costs to countries that already negotiate, the idea is that prices will come down without having to duplicate those country’s processes (or wider variety of government subsidized care). Indeed, prices will be effective not only for government-run insurance but private insurance as well.
Critics have several concerns. The first is that drug manufacturers could start charging more in other countries and thus increase the costs borne by the U.S. There are also incentives to price drugs higher initially as there’s some leeway in the bill for newer medications. Plus, many medications will never be included in the list––including higher-cost therapeutics. The manufacturers’ largest concern is that without sufficient profits they won’t be able to risk the long research and development processes that frequently yield little but occasionally deliver billion-dollar profits. The actual cost to produce a drug may be low, but just as CDs once cost up to $20 but only a few cents to manufacture, the price of drugs or music covers a host of things from R&D to artist development and recording sessions. Just as each successful drug underwrites a host of failures, one hit-making pop star covers dozens of a record company’s disappointments.
A study conducted in the spring of 2021 by Milliman at the behest of the West Health Policy Center showed a wide range of savings. By looking at both current trends and projected spending from 2023 through 2029, the study saw opportunities for employers to reduce their health care expenditures by nearly $200 billion during the period examined while their workers saved $53 billion in reduced premiums and $8 billion in out-of-pocket costs, It further found that those covered by ACA could see savings of $58 billion.
Projections are often at odds with reality. As just one example, the Congressional Budget Office underestimated the number of people who would enroll in Medicaid along with the costs per enrollee –– with around 50% more people enrolling than expected and costs some 60% higher than projected. This isn’t to discount other savings such as through lowered overall health care costs. Ezekiel J. Emanuel, M.D., who worked at the White House during the law’s passage, put this at an astonishing $2.7 trillion over the first ten years of ACA.
Passed by the U.S. House of Representatives in December of 2019, the bill would require passage by the Senate and the signature of President Joseph Biden in order to become law. While Biden supports the bill, its chances in the narrowly divided Senate are slim. Although both Republicans and Democrats have frequently spoken out against high drug prices, there are few signs of cooperation.
Written by John Bankston
References
- Constitution Day
- How do Americans stand out from the rest of the world?
- Affordable Care Act (ACA)
- Medicaid
- Does Federal Financial Aid Drive Up College Prices?
- Long-Term Trends in Medicare Payments in the Last Year of Life
- The Elijah E. Cummings Lower Drug Costs Now Act: How It Would Work, How It Would Affect Prices, and What the Challenges Are
- Health Care Costs By Country 2021
- The Health 202: Here’s how the U.S. compares to other countries on the coronavirus pandemic
- Why Do Americans Have Shorter Life Expectancy and Worse Health Than Do People in Other High-Income Countries?
- The Rising Cost of Health Care by Year and Its Causes
- Why do Americans die earlier than Europeans?
- Perverse Incentives: Do You See What I See?
- What economic lessons about medical costs can we learn from the market for cosmetic procedures?
- Why market competition has not brought down health care costs
- Competition keeps health-care costs low, researchers find