Reducing Healthcare Costs Through Pharmaceutical Policy

Lindsey Mattila (CMC ’17)

As healthcare costs continue to rise, it is becoming more important to find different areas of the healthcare industry where costs can be reduced. Although hospital care and physician and clinical services make up an overwhelming majority of the industry (at 32 and 20 percent respectively), the pharmaceutical industry may be the least complex healthcare sector to transform in the short-term. The pharmaceutical industry makes up ten percent of the industry’s total costs which are valued at $324 billion. Additionally, though it does not make up the majority of the healthcare sector’s spending, pharmaceutical spending has increased at the greatest speed. This pattern of rapid increase in costs creates more urgency to change the market sooner rather than later.

The United States is one of the only developed nations without legislation to control the price of pharmaceuticals. This lack of regulation has allowed pharmaceutical companies to increase prescription prices, at times from $40 to $400 over only a month. Insurance companies have reacted to the price hikes by increasingly shifting the burden to consumers by raising deductibles. This increase in deductibles leaves customers with less money in their pockets, as the amount of out-of-pocket expenses that must be met before healthcare plans will kick in makes healthcare more expensive.

Part of the issue of rising pharmaceutical costs is due to doctors’ excessive use of brand-name prescriptions. Seven out of the ten best-selling drugs in the United States are also available in generic form, but many doctors are still writing prescriptions specifying that they must be filled with the brand-name. A researcher at Harvard Medical School found that one of the many reasons doctors are more likely to require that prescriptions be filled by brand-names is when doctors received some perk from a pharmaceutical company such as free samples, speaking opportunities, and gifts. This data implies that doctors may have a conflict of interest when prescribing medication, and this may be at the cost of consumers.

Pharmaceutical prices affect more than consumers and insurance companies – prices affect the government too. The government, as the source of funding for Medicare and Medicaid, is actually the largest purchaser of pharmaceuticals in the United States. Both programs have been becoming increasingly expensive, and are both expected to rise as the Baby Boomers age. This is important for two reasons: first, it indirectly affects taxpayers whose money goes toward Medicare and Medicaid costs. Their tax money is being spent inefficiently if Medicare and Medicaid patients are receiving brand-name drugs when there are cheaper generic alternatives. Second, it affects the federal government because spending dollars on name-brand pharmaceuticals diverts these funds from other tax-funded programs.

There are a few potential solutions to this problem. First, the government could create a mandate that limits contact between pharmaceutical companies and doctors. Second, the government can require that all hospitals and doctors prescribe generic versions of prescriptions when available. Additionally, the government can restrict who pharmaceuticals can advertise to. If pharmaceutical companies are unable to spend money marketing to doctors and consumers, then they may spend more resources on research. A GlobalData report found that a majority of the top 5 pharmaceutical companies are spending more than three times the amount on marketing than they are on research and innovation. The resources they are putting toward marketing are indirectly slowing pharmaceutical innovation that could increase quality and variety of drugs and treatments, which could help to reduce costs as well. Lastly, the government can allow international pharmaceutical companies to ship in prescription alternatives to create additional competition when leaders in the market start charging unaffordable amounts.
Those who favor a more limited government argue that these regulations would violate free market principles, and would constitute an undue burden on the pharmaceutical industry. On the other hand, there are many that would argue that these regulations are just the beginning of policies that we need to properly protect consumers who are in need of sometimes life-saving drugs. Ultimately, changing the healthcare industry will necessarily involve more than pharmaceutical policy changes, but this specific sector provides the best opportunity to start experimenting with different policies that can successfully reduce costs.

One thought on “Reducing Healthcare Costs Through Pharmaceutical Policy

  1. Pingback: Auto Insurance is Mandatory, Why isn’t Health Insurance? – The Claremont Journal of Law and Public Policy

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