High pharmaceutical spending is due to both the prices of drugs and utilization.
United States healthcare spending increased by 7.5% in 2023* to $4.9 trillion, which is 17.6% of the gross domestic product, roughly twice the average percentage among comparably wealthy, industrialized nations. There’s plenty of blame to go around for high healthcare costs. Across the healthcare system, stakeholders share responsibility. This includes hospitals, drug makers, insurers, pharmacy benefit managers and others involved in product and service supply chains. What’s conspicuous is rather than seeing the issue as a collective problem in need of a collaborative solution, the different sides tend to point fingers at each other. The end-result is inertia. And the fall-out for patients is increased cost burden without improved quality of care.
In UnitedHealth Group’s first public appearance last month since the killing of its top executive, Brian Thompson, leaders recognized the public’s discontent with the healthcare system. At the same time, they defended the company’s business, laying the blame at the feet of other stakeholders, such as drug companies, healthcare providers and hospitals.
“Fundamentally, healthcare costs more in the U.S. because the price of a single procedure, visit, or prescription is higher here than it is in other countries,” UnitedHealth CEO Andrew Witty said on a January earnings call.
Witty acknowledged that Americans pay “disproportionately more” for prescription drugs than people in other countries, using the example of an obesity drug costing $900 in the U.S. versus about $90 in Europe. But he stressed that PBMs, such as UnitedHealth’s Optum Rx, aren’t at fault, and are actually helping keep prices down as they negotiate rebates off of the high list prices. And why such high list prices? Witty pins the blame squarely on drug companies.
Perhaps unknowingly, Witty seems to be adhering to a conventional theory. A 2003 article in Health Affairs provocatively titled “It’s the prices, stupid” found that the sizable differences in health spending between the U.S. and other countries were explained mainly by healthcare prices. An update to the study in 2019 concluded that prices continued to be the primary reason why the U.S. spends more on healthcare than any other country.
But left out of Witty’s remarks was that the rebates he mentioned, which lower net costs of certain drugs, don’t directly accrue to patients. Moreover, sometimes it’s in the interests of PBMs to favor medications with higher list prices and therefore higher rebates. So, while there can be a substantial difference between an individual branded pharmaceutical’s list and net price, (generic) competitors with even lower net prices aren’t necessarily preferred by PBMs.
Additionally, OptumRx, the group’s pharmacy benefit manager, along with its two main peers, Express Scripts and CVS Caremark Rx, have pocketed an additional $7.3 billion over acquisition cost thanks to price manipulation, according to the findings of a report issued by the Federal Trade Commission last month.
Fortune reported that CVS Caremark criticized the findings for cherry picking particular treatments in an effort to push what the PBM called an ‘anti-PBM’ narrative. Nonetheless, questions remain regarding whether certain PBM business practices are anti-competitive.
Systemwide Misaligned Incentives
On prescription drug costs, scapegoating is the theme. But there’s a much larger problem at hand than simply the drug maker-PBM feud. The system’s financial incentives aren’t aligned with bringing down costs.
Every stakeholder has a financial stake in the business of healthcare: Among others, drug makers, hospitals, insurers and pharmacy benefit managers. Each wants a piece of the profit pie. In and of itself, this isn’t problematic. Profit-seeking behavior generally works towards everyone’s benefit in most sectors of a smoothly operating capitalist economy, as Adam Smith first described more than 250 years ago. But in healthcare, markets are riddled with imperfections, which some call market failures. For one thing, there are very high levels of uncertainty, starting with consumers making choices about insurance to cover future health events. There’s also asymmetric information, which in very simple terms means that doctors know (much) more about what to prescribe than the patient. Third party payments shield patients from the actual costs of treatment. Finally, the system is rife with misaligned regulations or missing ones altogether.
Section 340B of the Public Health Service Act enacted in 1992, for instance, includes an important goal of allocating scarce federal dollars in such a way as to provide the uninsured and indigent populations with heavily discounted outpatient prescription drugs in hospital settings. Pharmaceutical manufacturers must provide the up-front discounts, which can be 50% or more in some instances. But the program does not require hospitals and other “eligible covered entities” to pass on the savings it gets from mandatory discounts to vulnerable populations. Evidence suggests that hospitals, clinics and other entities, such as pharmacy benefit managers, are creating revenue streams by purchased steeply discounted drugs and then getting reimbursed by the government, Medicare, at higher rates.
At the same time, pharmaceutical manufacturers have few if any guardrails around the launch prices of their products irrespective of whether these align with value. Moreover, business models in place such as “buy-and-bill,” in which doctors who run clinics can purchase physician-administered drugs and get reimbursed at the average sales price plus a 6% markup, incentivize the use of pricey medicines.
Practicing physician and professor Adam Brown explains that all who are involved in the healthcare ecosystem bear “some responsibility” for the dysfunction of a “broken system” in which quality and access are problematic along with rising costs and corresponding lack of affordability. Not acknowledging each entity’s role and shifting blame onto others isn’t constructive. Brown points out that “we must each do our part to solve it.”
And yet, no stakeholder wants to accept even partial blame for rising costs. It’s therefore far from clear whether the different players would want to collaborate to move towards a solution.
The problem with a healthcare system that generates higher costs without necessarily producing commensurate quality of care is that ordinary patients—around which, supposedly, the system is built—face ever-rising insurance premiums and out-of-pocket costs, but also less wage growth. And for employers and federal and state governments, higher costs imply greater financial burdens to support insurance programs for employees or beneficiaries.
