Politicians need to focus on hospital, not drug costs
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With the Congressional Budget Office’s scoring of revisions to the Affordable Care Act, the issue not merely of access but of soaring health-care costs is front and center. It’s a big problem, one that I tried to tackle with a bill to introduce Medical Savings Accounts 30 years ago. Unfortunately, health costs have more than quadrupled since then. But we can find long-term solutions if we follow common-sense economics. Here are two simple remedies: first, focus where the money is, and, second, remember that the basic rules of supply and demand still operate, even in a market with so much government intervention.

Out of the $3.4 trillion we spend on health, $1.1 trillion goes to hospitals and $684 billion to physicians and clinical services, a category that includes all outpatient services provided in doctors’ offices and clinics. Far behind in third place is spending on prescription medicines, at $347 billion, according to a study issued Feb. 10 by the Altarum Institute. So: one-third of hospitals, one-fifth on outpatient services, one-tenth on drugs.


Why is it, then, that so many politicians focus on drug costs and not on hospital costs? The average one-day stay in a U.S. hospital now costs $5,000. That’s seven times as much as in Australia. Heart-bypass surgery averages $78,000, compared with $24,000 in the U.K.


One reason for the obsession about drug costs may be political; every member of Congress has a hospital in the district but only a few have drug manufacturers. Another is the way health insurance works. Americans pay out of pocket just three percent of hospital costs, but, because of high deductibles and co-pays, 15 percent of pharmaceutical costs. 

This insurance system is counter-productive. It discourages the use of lower-cost medicines that can keep patients out of higher-cost hospitals. Every additional dollar spent on diabetes medications, for example, saves seven dollars in other medical costs. And if a drug were invented to prolong the onset of Alzheimer’s by just five years, the estimated savings to the health care system would be $367 billion. 

Hospital, physician and clinical spending rose $87 billion last year; drug spending, $13 billion. If you were the CEO of any business, where would you put your efforts to control costs?

Supply and Demand. When supply rises or demand falls, prices decline. On the supply side, the U.S. can, for example, have more well trained professionals provide care now administered only by physicians (such as chronic-disease management) and by speeding drug approvals and getting more generics to market.

But the demand side is key. The root cause of health spending is lack of health. People end up in the hospital because they are sick, and, compared with citizens of other rich countries, Americans are a lot sicker — often because of unhealthy living. If we could get healthier, we would reduce the demand for health-care services.

“A lot of these proposals being discussed about controlling health-care costs really don’t address the underlying issue, which is rising disease prevalence,” says Kenneth Thorpe, chairman of the department of health policy and management at Emory University. “You see this rise in chronic disease spending. Much of it is potentially preventable.”

The three diseases responsible for the most spending in the U.S. are diabetes, ischemic heart disease (heart attack and stroke), and lower back and neck pain, according to a comprehensive study. In most cases, the three can be prevented or mitigated through exercise, good diet, and smoking cessation.

The U.S. spends much more than other countries on health care, but we spend much less on the social services that can reduce health costs — just 19 percent of GDP, compared with an average of 30 percent for other developed countries. For example, services that help a disabled person recover quickly can reduce the time the patient is sick and racking up large inpatient and nursing-home costs.

Another way to reduce demand for more expensive inpatient and outpatient health services is better compliance. “Drugs don’t work in patients who don’t take them,” said the late Surgeon General Everett Koop. A typical large study found that for diabetes and high cholesterol, a high level of medication adherence was associated with lower disease-related medical costs.” Other studies have found that only 43 to 78 percent of patients with chronic conditions are compliant.

There is no need for despair. Part D Medicare, which provides seniors with a pharmaceutical benefit through the principles of competition, is an example of what we can achieve. While the inefficiencies of our system are complex, the good old economic verities still rule: focus on the biggest costs, increase supply, and decrease demand. 

David Dreier is a fellow at the Brookings Institution. He served from 1981 to 2013 in the U.S. House of Representatives, including 10 years as Chairman of the Rules Committee.

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