The “drug cost crisis.”

During my relatively brief tenure on the faculty of the University of Kentucky College of Medicine, I enjoyed the privilege of participating in UK’s first “Certificate in Medical Management” program. The business school faculty ran the course, with some additional input from other faculty. Although I might stumble on some specifics, the major themes of what we learned have stayed with me. I think that explains my fascination with the “drug cost” headlines that are appearing with alarming frequency.

This is a topic that can arouse even the most factually unarmed to foaming fury, so I’ll proceed very carefully. Peter Bernstein, in his wonderful book Against the Gods, documents that various forms of the insurance business have been around since at least 1800 BC. Without getting too technical, today’s insurance practices have benefitted from steady advances in both math, basically statistics, and data handling, so-called “big data.” However, there are some fundamental and intuitive facts that no one can dispute.

First, illness is not equally distributed in the general population. Some individuals have substantially greater health burdens than others. In fact, the National Institute for Health Care Management Foundation analysis of data from the 2012 Medical Expenditure Panel Survey shows that the less expensive 80% of the civilian non-institutionalized US population accounted for 18% of the cumulative total health care spending that year, while the more expensive 20% of the population accounted for the remaining 82% of spending. The “80/20 rule” has some validity!

Second, with the exception of a few dramatic diseases like Ebola, in developed societies the burden of illness is both chronic and costly.

Third, other things being equal, if the goal of insurance is to cover the health care costs (or automobile losses, or shipwreck costs) of a population, a larger the pool of insured individuals will result in a lower cost to each individual.

Given these three basics, the conclusion seems straightforward that the least expensive approach to health insurance is to require that everyone in a large pool, say the US population, have a basic policy.  Does this mean the end of the private health insurance business? It hasn’t in Europe, where private insurance often adds coverage beyond the basics. It’s the kind of approach that says, “At least, everyone should be able to ride a bus or a train. If you want a fancy car instead, that’s up to you.”

Now, just for fun, let’s move on to drugs. I would like to call your attention to a piece by Peter Sullivan posted on a site called “The Hill.” The Center for Medicare Services, or CMS, has collected some interesting data. The spreadsheet is available on line and worth a careful look. The take-home message is that just 40 drugs out of the 3,761 in the Medicare prescription drug program make up a full 33 percent of the total $121.5 billion in yearly costs. That’s even more lopsided than the 80/20 rule. What’s more interesting is that if we focus on the set of indications for those drugs, we will narrow the field even more to hepatitis-C, oncology, and severe forms of mental illness.

Well, cost cutters, one approach would be to deny progress. These expensive drugs are used to treat illness that has not been treated previously. Instead of having patients die from liver failure and metastatic cancers, we are adding to the population of individuals with expensive chronic diseases. Of course the total cost of drugs will go up! One alternative would be not to use these new agents, and let the diseases run their course. Aside from the moral issues, that’s NOT what insurance is about. It’s about spreading the cost across the largest possible pool.

In addition, as we have learned from the EU, national health systems have a lot of leverage in negotiating drug costs.

To summarize what the data really show about the US drug cost “crisis” is that:

  1. The real drivers of health care cost increases are hospital costs and personnel costs.
  2. A large majority of the population accounts for only a small portion of health care costs.
  3. Expansion of the subset of patients with complex chronic disease that can only be managed with expensive new drugs accounts for most of the increase in drug costs.

Are these problems that can be entirely attributed to the pharmaceutical industry? I think not. Rightly or wrongly, the industry has tried to figure out what price the fragmented market will bear. In the rest of our society, that’s a generally accepted practice. On the other hand, we can’t escape the fact that multiple competing interests have repeatedly defeated attempts to develop a more rational health care system.