Prescription Drugs Lower Long-Term Costs
By Sally C. Pipes
San Francisco , CA
In the opening pages of President Barack Obama's just-released budget, the rising cost of health care is described as "one of the big drains on family budgets and on the performance of the economy as a whole."
Later in the budget, he suggests that America spends too much on prescription drugs -- implying that drug prices are responsible for America's high healthcare costs. This is a misconception, though. And it will likely hurt Obama's plan to revamp the nation's health system.
At first glance, it's understandable why some might believe this. In 2007, the United States spent $286.5 billion on prescription drugs. To put that into perspective, it's more than the entire GDP of Ireland.
If you look at isolated statistics like this, it's easy to get the impression that prescription drugs are to blame for America's skyrocketing healthcare spending. But in reality, prescription drugs actually reduce medical spending.
How? By obviating the need for prolonged hospital stays and expensive surgeries.
Among the biggest drivers of rising healthcare spending are chronic diseases. These are illnesses that, like diabetes and heart disease, demand regular treatment over the course of a patient's life.
Between 1994 and 2004, the prevalence of diabetes doubled. High blood pressure is also on the rise. And heart disease now kills one person every 34 seconds.
Today, caring for people with chronic diseases accounts for about 85 percent of all US healthcare spending. So, clearly, one of the most effective ways to lower overall healthcare costs is to control chronic disease. And drugs have proven to be one of the most effective -- and inexpensive -- ways to do just that.
A 2005 study published in Medical Care found that every additional dollar spent on drugs for blood pressure, cholesterol, and diabetes saves $4.00 to $7.00 off other medical spending. Similarly, a recent paper from the National Bureau of Economic Research (NBER) found that Medicare ultimately saves $2.06 for every dollar it spends on medicines.
This makes sense. A daily dosage of Lipitor is cheaper than emergency heart surgery.
But, while drugs may lower healthcare costs, that doesn't mean that they're cheap. In fact, the process of developing a new drug is extraordinarily expensive.
It takes, on average, 10 to 15 years and $1.3 billion to bring a single new drug to market. This tremendous investment is reflected in the prices we pay.
Fortunately, in recent years, drug prices seem to be falling.
In September 2007, the US Department of Labor reported that the annual inflation rate for drug prices was at its lowest in the three decades since it began tracking such numbers. The annual inflation rate was 1 percent, well under the rate of overall inflation.
President Obama would be wise to keep this in mind in the coming months as he moves his healthcare reform agenda forward. If he doesn't, he could end up hurting the industry most able to drive healthcare prices down.
(Sally C. Pipes is President and CEO of the Pacific Research Institute. Her latest book is The Top Ten Myths of American Health Care)
