There’s a right way to tackle high health costs

Americans are becoming more alarmed about health care costs and with good reason. Insurers have announced big premium increases for some of the plans in the ObamaCare exchanges, and patients are paying more and more out of their own pockets when they go to pharmacies.

We spend 18 percent of GDP on healthcare. We get a lot for that money, but no other developed country spends more than 12 percent. Something is wrong, and with the election over, now is the time for an overhaul. But to make the right repairs, we have to understand which parts are truly broken. Let’s start by recognizing just how complicated and opaque it is — and how many myths pervade the public discourse.


A good place to begin is prescription drugs. For all the recent commotion, medicines account for only about one in every eight dollars spent on health. The biggest category of spending is hospital services, followed by payments to physicians and other health professionals. Drug costs have been rising no faster — and, recently, even slower — than other health costs

Nor are drugs the primary reason that insurance premiums are going up. Outpatient costs, incurred in doctors’ offices and care centers, account for 30 percent of the expected rate increases in 2017; prescription drugs, just 14 percent.

Drugs also have major advantages. First, they prevent patients from having to use the more expensive parts of the system, like hospitals. For example:

  • New drugs can, in three months or less, actually cure Hepatitis C, a disease that, left untreated, can lead to cancer and require a liver transplant at a cost of more than $500,000.

  • Every additional dollar spent on diabetes medications saves seven dollars in other medical costs.  

  • If a drug were invented to prolong the onset of Alzheimer’s by just five years, the estimated savings to the healthcare system would be $367 billion.

Second, drugs are the only health category with built-in reductions in costs, which fall over time as patents expire and competition accelerates. For example, the generic forms of Lipitor and Plavix (which fight heart disease) and Seroquel and Zyprexa (antipsychotics) cost 90 percent less today than the brand versions did in 2010. Many cancer drugs, including Gleevec (leukemia), are losing patent protection and becoming available at discounts of 50 percent or more.

But if drugs are so cost-effective, why do consumers complain that they are spending so much on them? The answer lies in how insurance policies are currently designed. Because of high deductibles and co-pays for medicines, Americans pay 15 percent of the cost of prescription drugs out of their own pockets but only 3% of the cost of hospitalization and nine percent of the fees of physicians and other clinicians. As a result, individuals spend 50 percent more on drugs than on hospital expenses — even though total hospital costs far exceed drug costs, or any other healthcare category.

The amount we spend on inpatient and outpatient treatment consumes more than healthcare spending, like pharmaceuticals, we miss an opportunity to bend the really big cost curve.

What you pay out of your pocket for a drug or any other healthcare service is determined by your insurance company. The real problems are the way insurance plans are structured, the lack of access to preventive care (including medicines), and incentives that don’t reward providers for getting patients well.

Because they are pressured to drive down costs in a given year, regardless of the long-term consequences, insurers often get between patient and doctor. A common practice is to refuse to reimburse the price of the physician-recommended drug and instead steer the patient toward another medicine. This process can sometimes be reasonable, but too often patients are in health plans where no treatment is available at an affordable co-pay. Doctors spend an incredible 20 hours a week on such “prior-authorization” activities, getting approvals from Pharmaceutical Benefit Managers (PBMs) and insurers not just for drugs but for medical procedures.

Meanwhile, PBMs, the powerful middlemen that try to hold down payouts for insurers, add further complexity with rebates, discounts and restricted formularies (their approved medicine chests). Their practices have even less oversight than those of insurers, and PBMs avoid state-level regulation. Because they are accountable only for a short-term drug budget PBMs have even fewer incentives to consider longer-term effects of their formularies on hospital and physician costs. A more effective medicine, even if it comes with a higher price tag, can prevent a patient from running up a large hospital bill a year or two later.

Insurers and PBMs aren’t villains. They are just trying to operate within a complex existing system, where drugs seem to be the easiest cost to control. But if we want real reform of healthcare, we need to change that system itself. We have to figure out how to give hospitals and physicians access to the tools — including medicines, preventive behavior and data — that keep patients from getting sick. No reform is possible by focusing on outliers and trivialities. Let’s tackle the big problems first with a solution that is far-sighted and keeps future treatments and cures coming.

James K. Glassman, former Under Secretary of State for Public Diplomacy, is chief health editor for Our American Network radio.

The views expressed by contributors are their own and not the views of The Hill.