By Danica Simic (BSc Economics With A Year Abroad)
[This piece is one of the top-scoring submissions from the “Government, Welfare and Policy” module for third-year undergraduates. It exemplifies the best of student work, showcasing their ability to engage and inform with standout blog-style writing. Enjoy one of this year’s top-marked essays, a testament to the students’ passion and creativity!]
Introduction
Prescription drug prices in the United States (US) are two to three times higher than in other OECD countries. Approximately 1 in four Americans have difficulty affording their prescription drugs due to high out-of-pocket costs with 82% of the population arguing that the cost of prescription drugs is unreasonable. This leads to the underconsumption of necessary drugs as a quarter of the population has admitted to skipping doses or cutting pills in half due to high costs.
The underutilisation of medication can have long-term private and social costs.
Healthcare System in the US
The issue of high drug prices can be directly linked to the foundations of the healthcare system. The US relies on a primarily privatised system with elements of public production which is funded by both the state and federal governments. As with every healthcare system, this exhibits inherent strengths and weaknesses in its structure and operations. The assessment of healthcare systems can focus on four key factors: accessibility, cost containment, waiting list times, and the range of choices available to consumers.
Consumer Choice
A predominantly privatized healthcare system significantly benefits consumer choice.This model inherently fosters innovation, offering consumers a wide array of options in terms of medical professionals, treatments, and medications.
Research and development costs are a primary factor contributing to the high prices of drugs. Around the world, the USA’s medical innovation is recognised and praised as they are the world leaders in healthcare innovation accounting for approximately 40% of the global healthcare research and development expenditure in 2022.
The reason for this lies within the healthcare system. A privatised healthcare system promotes innovation through financial incentives. Programs such as the MacArthur “genius” grant illustrate this, by awarding recipients $500,000.
Whilst this encourages competition, this is usually done through the differentiation of products rather than competing on price. With the continuous development of new drugs and the improvement of old formulas, numerous patents are being issued. These patents grant companies temporary exclusive rights on new products, monopolising markets and giving them the ability to set high prices.
Furthermore, the direct-to-consumer marketing strategy popularised in the US increases consumer awareness of healthcare options. This increased awareness minimises the asymmetric information which can be found in state-funded systems such as the UK, ensuring individuals can select treatments which best cater to their specific needs, optimising personal welfare.
Waiting List Times
Minimal waiting list times for elective procedures are another benefit of a privatised healthcare system. This is due to a better ratio of healthcare providers to patients. This can improve the quality of life and overall health and national productivity levels as it reduces the length of time individuals will have to be inactive in the workforce, due to injury.
One of the reasons why people may be less likely to visit a physician is due to the high out-of-pocket cost associated with it. This discourages individuals from seeking medical help for minor issues, as they may feel that the costs will outweigh the benefits. In the short term, this may be viewed as a positive as it reduces the burden on the healthcare system. However, delaying medical attention can result in more serious health issues in the long run, ultimately worsening the situation. This also only intensifies the disparity between the health care available to low and high-income earners.
Accessibility
Due to the minimal focus on redistribution and equality within the US healthcare system, accessibility is often dependent on socioeconomic status. Higher-income individuals can afford to pay higher insurance premiums giving them better choices of physicians and more flexible insurance plan such as a Preferred Provider Organisation (PPO) in which they have a greater choice of physicians accessible to them, as well as having direct access to specialists rather than having to go through referrals. Health Maintenance Organisations (HMO) plans on the other hand, are cheaper and this is reflected in the service provided. With a HMO plan, individuals only have access to medical professionals within their chosen network. Additionally, they have less autonomy as they can only get access to specialists with referrals.
Being wealthier also enables them to be able to move to geographical locations which are better for better healthcare access.
Cost Containment
The downfall of a privatised healthcare system, especially in the case if the US, largely comes down to poor cost containment. Where the objective should be to maximise health objectives such as reducing morality and morbidity, with minimal costs, the US does the opposite. Despite the US allocating a disproportionately high percentage of its Gross Domestic Product (GDP) to healthcare expenditures (as seen in Figure 1), markedly more than any other nation, the resultant healthcare outcomes do not proportionately reflect such substantial investment. Compared to the rest of the world, the US remains as an outlier when looking at healthcare expenditure per capita in comparison to life expectancy (as seen in Figure 2), as its life expectancy is lower than many other nations that spend less on health per capita.
The discrepancy in investment levels and health outcomes can partly be attributed to the fact that the high costs do not necessarily mean high-quality treatments. This can be observed by the fact that 84% of the drugs consumed in both the UK and US are generic brands indicating that the US are not utilising their excess healthcare expenditure on higher-quality medications.
Medicare and Medicaid
In response to the systematic shortfalls of the healthcare system such as high out-of-pocket costs to the consumer, the US government implemented Medicare and Medicaid. These are two government-subsidised health insurance programs catering to specific demographics within the population that are likely to encounter difficulties in paying medical expenses. Medicare provides health coverage to people aged 65 years and older, and those with certain disabilities, while Medicaid provides healthcare assistance to low-income individuals and families. The initial implementation in the 1960’s along with the expansions over the years, aim to alleviate the financial burden of the high costs by introducing elements of public financing, correcting the underutilisation of medication.
Despite efforts, a coverage gap persists for those individuals whose earnings exceed Medicaid eligibility criteria, yet are still earning less than what is required to comfortably pay for insurance, resulting in being priced out of medical coverage. The multiple expansions of eligibility criteria, primarily Obama’s Affordable Care Act of 2010 nicknamed “Obamacare”, were partially successful in reducing the coverage gap, but ultimately fell short of complete success.
Another issue with Medicare and Medicaid is the lower reimbursement rates for practitioners compared to what they would get for private insurance. Due to the intrinsic, selfish, profit-over-welfare maximising attitude, that this system promotes, there is a limited network of doctors who accept this insurance, which reduces access to care and lowers the quality of care overall. This furthers the healthcare inequality between low and high earners, facilitating a persistent role for low-income earners in the poverty cycle.
Pharmacy Benefit Managers (PBMs)
Also, during the 1960s, Pharmacy Benefit Managers emerged. Whilst PBMS are not implemented by the government, they help regulate drug prices by determining the prices and tiers of medication. In the context of a privatised healthcare system, pricing mechanisms are subject to market forces. However, with the monopolistic tendencies that such a system may encourage, it is imperative to establish appropriate regulations that can effectively minimise negative externalities. PMBs serve as intermediaries between drug production companies and insurers to control prices and negotiate discounts. To enhance the accessibility and affordability of drugs for consumers, PMBs negotiate with drug production companies. With the leverage of a large client base consisting of pharmacies, they can re-negotiate and reduce drug costs.
Conclusion
Having assessed the complex dynamics of the healthcare system in the US and the effects they have on drug prices we are left with one major question. If the excessive healthcare expenditure cannot be accreted to the quality of medications or healthcare, why are the drug prices extortionate and how can this issue be resolved?
The causes behind the high prices of drugs, underutilization of medication, and a lack of redistribution are deeply entrenched in the fundamentals of the primarily privatised healthcare system.
There has been a concerted effort to control drug prices to increase accessibility for all. Despite attempts to implement policies such as Medicare and Medicaid as a means of minimizing further damages, these programs have yet to get close to closing the coverage gap. In order to ensure their effectiveness, it is imperative that these policies are regularly amended based on the costs of living and the changing needs of the population. Nevertheless, even with effective price regulations in place and the closing of the coverage gap, the healthcare system will remain flawed. Regardless of the policies implemented, without comprehensive reform and a better balance between private and publicly produced healthcare, these issues will persist.
Whilst, this is not a feasible goal in the short-term, it should be considered as a long term-aspiration to pursue. In the interim, emphasis should be placed on redistribution as a move to equalising healthcare opportunities is what will maximise social healthcare benefits.
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