Rising Drug Prices Are The Root Cause of Healthcare’s Cost Problem

Healthcare has a cost problem. No one disputes that. But what many would dispute is the assertion that rapidly rising drug prices are the root cause of the problem. They are, as the latest data from the CMS and major hospital systems clearly show.

The pharmaceutical industry’s campaign to deflect attention from high drug prices was on display during the confirmation hearing for Alex Azar, the former Eli Lilly executive slated to become the next HHS secretary.

When pushed on what he would do to rein in drug prices—his highest priority, according to his prepared testimony—Azar rejected Medicare negotiations, including for most Part B (physician-administered) drugs. Specialty drugs and cancer therapies, usually administered in physician offices or hospital outpatient settings, are among the most expensive in medicine.

Azar said his second-highest priority is to make healthcare more affordable. That will be a neat trick without tackling the No. 1 cause of rising costs, which is out-of-control drug spending.

I’ve always counted myself among those who see the problem of rising healthcare costs as a “Pogo” issue. “We have met the enemy and he is us,” as the newspaper cartoon character used to say.

High hospital prices, overpaid doctors, overutilization, disparate regional care patterns all have come in for a share of the blame in recent years. There is a modicum of truth in each of those claims.

But, after closely examining the latest CMS expenditures report, the indisputable fact is that rising drug and medical-device prices remain the most serious contemporary cost problem the healthcare industry has. Indeed, it threatens to overwhelm all other efforts at cost control, many of which are showing signs of progress.

Let’s do a quick tour through the math.

When the Affordable Care Act passed in 2010, healthcare’s share of the national economy stood at 17.4%. It fell to 17.2% by 2013, but by 2016 was back up to 17.9%. The small but noticeable increases in recent years are raising fears we’re re-entering a period of uncontrolled spending.

However, not all sectors are increasing at the same rate. Total personal healthcare consumption, not adjusted for inflation, rose 16.7% between 2013 and 2016.

But its hospital spending component rose at a slower pace-15.5%. Professional services, which is mostly physician office-based care, also rose more slowly-16%. On the other hand, drug spending, whether purchased through pharmacies, mail order or online, rose by 23.9% over the past three years.

That led to the drug industry gaining nearly a full-percentage-point share of the overall healthcare economy since 2013. In an economic sector where change is glacial, an increase of 1 percentage point is huge.

And the share grab is actually much worse. Retail drug sales don’t include the most expensive drugs-those delivered in hospital outpatient and physician offices. The CMS doesn’t track that data separately, but one can get a glimpse of what’s happening by examining the latest financial reports from major hospital systems.

Ascension, for instance, saw its margins collapse in its most recent quarter. Total operating expenses at the nation’s largest not-for-profit hospital system rose 12.9% over its last three full fiscal years, an average of 4.3% a year.

Salaries, its single largest expense, rose about at the same rate. But supply costs rose 15.8%, or 5.3% a year-a full percentage point higher. Are the rising cost of bed pans, hospital gowns and syringes to blame? It seems unlikely when hospital admissions and lengths of stay are shrinking every year.

Where is that care going? It’s moving to outpatient settings, where they deliver cancer chemotherapy and other high-priced specialty drugs.

Former drug executive Azar says his two biggest priorities will be dealing with high drug prices and rising healthcare costs. Thing Two, meet Thing One.

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