Tragically, Health-Care Spending is Slowing

 

By Burke Balch, JD & Jennifer Popik, JD, Robert Powell Center for Medical Ethics

Burke Balch, J.D.

Burke Balch, J.D.

The Center for Medicare and Medicaid Services (CMS) issued a new report that showed that for the fourth year in a row, healthcare spending was at a near-record low. 2009 to 2012 saw the slowest health care spending growth since the 1960’s. In 2012, health care spending did not even keep up with the growth in the overall economy.

Many mainstream media and commentators are foolishly hailing this slowdown. In fact, it means those who need life-saving and health-preserving treatments are getting fewer of them, especially the cutting-edge innovations that make healthy survival more probable now and which increase the prospects for improvements in health care in the future.

While it is typically true that in a recession, many people are forced to spend less on health care, the reduction in spending has lingered longer than is usually acknowledged.

Jennifer Popik, JD

Jennifer Popik, JD

Another explanation is that Obamacare-imposed limits are contributing to the slowdown in health care spending. Certainly, the White House was quick to boast about such an effect.

White House deputy assistant for health policy, Jeanne Lambrew, wrote on the White House blog,

“The Affordable Care Act [ObamaCare] was designed to contribute to and sustain slow growth in health spending in this nation. . . .

“We have already seen powerful examples of hospitals and other providers who have already begun to embrace changes to their practices to bring down costs in the wake of the Affordable Care Act….

“While there is a debate about how much the Affordable Care Act has contributed to this health cost slow-down, there is no doubt that it reduced Medicare spending growth, and most experts believe that Medicare savings spill over into the private sector. And it is a fact that health care prices have grown at record-low rates – and are less affected by recessions and cost sharing than health care utilization is.

“. . . [T]he review of premium increases of 10 percent or more helped 6.8 million Americans save an estimated $1.2 billion in 2012 after their insurers cut back on planned increases as a result of this process.”

Lambrew might be exactly right – that Obamacare limits are driving a significant part of the slowdown in spending. When the government limits what can be charged for health insurance, it restricts what people are allowed to pay for medical treatment.

But while everyone would prefer to pay less–or nothing–for health care (or anything else), government price controls prevent access to lifesaving medical treatment that costs more than the prices set by the government. In fact, the Obama Health care law is full of various ways that the government can limit what resources Americans will be permitted to devote to saving the lives of themselves and their family members (documentation at www.nrlc.org/HealthCareRationing).

An additional explanation for the slowdown in healthcare spending that some economists point to has to do with prescription drugs. In 2012, several patents on some expensive drugs, including Lipitor and Singular, expired. They were largely replaced with significantly cheaper generic versions.

In a recent story written for the Washington Post, Sarah Kliff includes the following quote from David Cutler, a Harvard economist who served as a health care adviser in President Obama’s 2008 campaign, commenting on the slow growth in Medicare.

“’This is another fascinating data point that suggests the changes now are being driven by a set of things that are different from the drivers in past years.’

Kliff then observes

“And while major drug patents won’t expire every year, Cutler points to doctors’ growing resistance to pricey medications as reason to believe growth in prescription drug spending could stay low. In 2011, Sloan-Kettering Memorial Hospital in New York announced it would not use a new cancer drug that would cost $100,000 — after which the drug maker, Sanofi, cut the price in half.”

It is understandable that many think it desirable to get a cancer medication priced at a cheaper rate, but that assumption is tragically wrong.

On average, of 5,000 potential new drugs tested, only one is eventually approved for patient use, and of those approved, only 30% recover their research and development costs.

The consequence is that any drug company’s investment in a potential new drug is a little like buying a ticket in a lottery: the odds of winning the jackpot are quite low.

If there is a $100 lottery with a ticket price of $1 and 100 to 1 odds against winning, you may buy the ticket despite the odds, because of the possibility of the high payoff. However, if the lottery prize is only $2 or $3, you are very unwise if you buy a $1 ticket at odds of 100 to 1! Few would do so.

Given the high odds against any given potential drug ever getting to the market and then actually making money, only the possibility of a high rate of return on the few that do can induce investors to invest.

The high research costs of the many drugs that fail to make it to market must be covered by the profit made on the few drugs that are successful, or the drug company will go bankrupt and out of business.

When Sanofi was unable to sell its innovative cancer drug at $100,000, it had little choice but to drop the price. After all, what it had spent on the drug’s research and development (and on research and development of the many other drug possibilities that failed) was what is known as a “sunk cost” – it had already been spent. And since the cost of actually manufacturing and distributing a drug is fairly low, it made sense for Sanofi to produce it at a lower price and try to recoup at least some of the company’s research and development costs.

But what is the effect on development of new drugs in the future? If you were an investor, having seen what happened to the price of what was expected to be a “jackpot” drug, would you be likely to put more money into Sanofi stock – or, indeed, to purchase more pharmaceutical stocks in general?

Economic bad times, such as America’s “Great Recession,” have many negative effects. One of them is the decrease in ability to pay for more and better health care. But Obamacare artificially limits what we are allowed to spend on health care so that even when the economy makes it possible to spend more, we keep spending less.

Consider an analogy. The Great Recession led to a significant fall in demand for new houses – spending on shelter decreased. Now, economists are hailing an upswing in spending on new houses as a sign of economic recovery.

But suppose the government had imposed limits on what people were allowed to spend on new houses, with the purpose and effect of limiting growth in spending on housing. If housing spending continued to be low, would that be hailed as a positive accomplishment? Certainly not! It would mean that the government was keeping Americans from getting the better housing they could afford.

Yet for some strange reason many rejoice at the notion that the low rate of growth in health care spending may be due not just to recessionary effects but to systemic changes wrought by Obamacare. If the government prevents us from spending what we can afford on more and better health care, the argument is that the money will be available for other things. But what good does it do you to be able to afford a bigger and better house, if, for lack of advanced medical treatment, you die?

The basic point is that health care spending is crucial to innovation and quality treatments. Now and for years to come, Obamacare will work through regulation and pressure on insurers to hold down spending (again, documented at www.nrlc.org/HealthCareRationing ) and will stifle both innovation and quality care. That is, unless it is repealed.

Please send your comments to daveandrusko@gmail.com.