McKinsey on drug costs

Moving on in our tour of the McKinsey Report. Last time we looked at the overall breakdown of the categories in which US health care spending exceeds those of its peers (on a per-capita, wealth-adjusted basis). We saw that outpatient care was the largest single contributor to the overage, at $436B, accounting for about 2/3 of the "excess."

The next major contributor, though a much smaller one, is drug prices. I've already ranted a bit about drug prices in early posts, or rather about what I see as the dead end of Medicare price controls. In those posts I argued that we needed to focus on cost, not on price. So what does McKinsey have to tell us about why drug spending is almost $100B a year more than you might expect from looking at our peers?

There are a few reasons for this, according to MGI:

1. Generally higher prices for identical drugs. On average we pay 50% more for a given drug than in other countries.
2. Our drug mix is more expensive. In other words, our drug choices tend toward the high end of the market.
3. Interestingly, these facts are offset by the fact that our per capita drug usage is LOWER than that of peer countries.

So, we actually use fewer drugs overall. But when we do use them, we use ones toward the higher end of the market. And when we buy those higher-end pills, we pay on average 50% more than other markets (77% in the case of branded drugs).

So the difference is due to drug prices. OK, why are drug prices higher here? Again, a mix of causes:

1. We have more money. The market will bear a higher price. Our greater wealth accounts for a bit over a third of the difference.

2. It can be argued the US is subsidizing pharma R&D for the rest of the world. This would account for a bit less than a third of the gap. (This assumes that price controls in peer countries cause many drug to be sold at low or zero margin).

3. Finally, unlike peer countries in which pharma spending on marketing is limited, as is the size of sales forces, as well as marketing directly to physicians, pharma firms spend a lot on these items in the US. This too accounts for a bit less than 1/3 of the total.

It seems to me these conclusions lead to some pretty clear ways we could hold drug costs lower. First, to push back on the more expensive drug mix, don't prescribe so many of the higher-end drugs, particularly drugs that have the "same mechanism of action" as less expensive drugs on the market. Well, that's easier said than done. Either doctors and patients will somehow work together to achieve that end, or it would be imposed by insurance pools that limit their formularies -- in other words, a form of rationing, which is apparently a concept that's anathema. Except of course that insurance companies public and private are performing rationing all the time already, certainly rationing of this sort -- see, for example, the VA's exclusion of Lipitor from its formulary.

Then, for the higher drug prices, two things. Firstly, apply significant pressure to other countries to relax their price controls to some extent, allowing pharma firms to charge higher prices there and more fairly distribute the R&D burden. Secondly, look closely at those countries that MGI claims limit pharma marketing spending, salesforce size, and direct-to-physician marketing, and draft a bill to do the same for us.