Drug Prices and Healthcare Costs – The Myth

Drug Prices and Healthcare Costs – The Myth

The healthcare cost per capita in the USA tops the average in the OECD, and many have tried – and are trying – to reduce the cost per capita. One of the main goals is to reduce drug prices in the USA. Is this the answer to high healthcare costs?

Drug manufacturing

Written By Eli Pelleg, COO

Healthcare reform in the USA has always been controversial. With a $3.12 trillion spend (17.4% of GDP), it is no wonder that healthcare is closely watched under the political lens (2016 ITA Pharmaceutical Top Market Report, US Department of Commerce). For example, one of Obama’s major initiatives was Obamacare, now in the process of being overwritten by the Trump administration.

However, we do not intend to delve into politics in this short article, but rather to discuss the healthcare costs in the USA and the myth that still rules it: The major driver for healthcare costs is drug prices.

It is true that Healthcare cost per capita in the USA ($9700) is by far higher than Israel, for example ($2532), and the average spending on healthcare in the OECD is only 12.5% of GDP compare to 17.4% in the USA.

In fact, the answer does not rely on drug prices alone. While drug companies are one of the first targets of President Trump campaign after the elections, if you look at the percentage of drug spend in the USA it is only 10% of healthcare expenditure compared to 15% in Israel and 20% in OECD.

Indeed, according to a 2016 Harvard Medical School research report, the drug prices in the USA are higher than any other country (in Time.com).

The main reason for this is the fact that like no other country in the world, drug prices are not monitored or controlled by the government.

But these prices have dropped in the last years, and the last 10 years' introduction of generic drugs saved the USA healthcare market more than $1.7 trillion (Market Realist). An introduction of a generic drug drives cost down by 45% from the original brand name when two generics are introduced to the market and by 77% when 5 generics are introduced.

The USA has already reduced drugs' prices to a minimum, and it seems that the pace of drug cost reduction is going to slow down significantly in the next few years for two main reasons: Generic drugs already count for 85% of drug prescription in the USA, leaving little room for market entry for additional drugs. An increasing number of drugs waiting for FDA approval are Biologics and Biosimilars, and their costs per unit are much higher than chemical-based drugs.

These reasons add up to the fact, that cutting 50% of drug prices through introduction of generic drugs or/and presidential influence (whatever works) will reduce only 5% of the total healthcare expenditure in the USA and reduce total cost per capita by only $500. Even after the above actions will be taken, when the new Biological and Biosimilar drugs will enter the market, the health cost per capita in the USA is still going to be 3.5 times more than in Israel.

In conclusion, as cutting 50% of drug costs is unrealistic and delivers little value, the healthcare system should look for other structural changes.

Eli Pelleg

Partner, Chief Operating Officer

Multidisciplinary Performance Improvement Expert

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