Libratto

DEPARTMENT OF RANTS

The Kaiser Family Foundation recently reported that the cost of health insurance for average American family rose nearly 8% this year, and noted that this rate is about double that of inflation (i.e., all goods and services). Coupled with this ongoing upward climb in cost is a growth in the fraction of people who are not insured – solid circumstantial evidence that one of the ways employers are dealing with rising cost is to simply not offer health coverage to employees.

In today’s “Economix” column in the New York Times, writer David Leonhardt goes contrarian, arguing that rising costs aren’t necessarily bad. At the core of his argument is that you have to pay more to get more, and that what Americans have gotten in terms of improved life expectancy is well worth the additional cost:

“…a baby born in the United States this year will live to age 78 on average, a decade longer than the average baby born in 1950. People who have already made it to their 40’s can now expect to reach age 80. These gains are probably bigger than the ones the British experienced in the entire millennium leading up to 1800. If you think about this as the return on the investments in medicine, the payoff has been fabulous: Would you prefer spending an extra $5,500 on health care every year — or losing 10 years off your lifespan?”

Matthew Holt over at The Health Care Blog is not convinced… nor am I, albeit for somewhat different reasons.

Here are my three beefs with the NYT piece:

1. The math is a bit more complicated than Leonhardt lets on. That “extra $5,500” is growing every year; over the life of an individual the amount per year would be quite a bit higher. To get a sense for this issue, if we assume that healthcare costs will outpace inflation by 3% each year, that extra $5,500 in costs for a child born today would rise to an extra $54,000 per year by the time that person is 78 years old. The cumulative extra cost over the life of the individual? A not-so-easy-to-dismiss $1.65 million dollars. Whether this additional expense is more than offset by the gains is a matter of taste, but it’s no slam dunk that this is a good deal from the societal perspective.

2. Many of the gains in life expectancy that are baked into that 10 year increase in life expectancy are not directly related to improved health care. Cigarette consumption per capita has plummeted to levels not seen since the 1930s, a reduction due primarily to increases in the price of tobacco products (i.e., cigarette taxes) and a decrease in the social acceptability of smoking (i.e., the quarantining of smokers via workplace smoking policies and public smoking laws). Furthermore, automobile travel is far safer (mostly due to an increase in the use of seat belts, and secondarily to airbags). To be sure, some of the gain in life expectancy is related to improvements in health care: greater use of cholesterol-lowering agents, better outcomes for specific cancers. Nonetheless, we would have enjoyed a big chunk of that 10-year gain in life expectancy had we not increased spending on health care.

3. Finally, waste remains the big problem in health care. Even if all of the increase in life expectancy was due to increased use in health care (it’s not), and even if the cost of that additional care is limited to $5,550 per year (it won’t be), it doesn’t follow that we should be content with that arrangement. Specifically, if we could reduce that extra $5,500 by $2,000 and still get the same benefit, shouldn’t we – especially if those savings could be used to fund coverage for the uninsured? Waste – defined as spending more but not getting more – is indefensible.

When it comes to prescription drugs, the level of waste is staggering. Leonhardt himself acknowledges this issue:

“The cost of health insurance can’t keep doubling every seven years, and wasteful spending — the brand-name drugs that are no better than generics, the treatments that haven’t been proved to extend lives or improve health — does need to be reined in.”

What he fails to appreciate is just how significant the issue of waste is. Set aside lifestyle drugs (e.g., hair loss and toe fungus). Set aside potential overuse (i.e., prescription drugs instead of lifestyle changes or over-the-counter alternatives). Set aside questions of price (e.g., Canadian prices for brand-name drugs versus those in the U.S.). Set all those clearly important drivers of waste in the prescription drug spend, and how much waste is left?

An eye-popping 25%.

About 25 cents of every dollar that we spend on prescription drugs represents raw waste: spending more, but not getting more.

Here’s the math. The typical health plan in the U.S. currently has a generic fill rate of about 55%. That means that of every 100 prescriptions filled, about 55 are for generics.

The clinical maximum generic fill rate today is about 80%. In other words, from a clinical standpoint, 80 of every 100 prescriptions could be filled for a generic instead of a brand.

Because generics are far less expensive than brand-name drugs, a 1% increase in the generic fill rate means about a 1% decrease in cost – with no compromise to health, and without shifting cost to patients. (In fact, patients typically have lower copayments for generic medications.)

That 25% gap in generic fill rate – the difference between where we are today and where we could be clinically – is waste. We’re spending more but not getting more. And until we drive out that kind waste, it’s hard to believe that we’re really getting our money’s worth.

Opinions expressed are those of the author alone.