Medicare savings won’t make a dent in healthcare costs

SUMMARY: Allowing Medicare to negotiate drug prices is popular with voters because the media has been focused on the high price of some drugs, but this measure won’t lead to lower healthcare costs. Still, in a JAMA study, the median net income (earnings) expressed as a fraction of revenue was significantly greater for pharmaceutical companies than nonpharmaceutical companies (13.8% vs. 7.7%).

The drug industry is trying to convince voters that government negotiations with drug companies will lead to less innovation. The problem is that voters don’t believe that pitch. Robert Blendon, a professor at the Harvard T.H. Chan School of Public Health, says, “at the moment, people are skeptical enough of the pharmaceutical industry that they’re going to have a tough time saying that if the government gets you a discount, you won’t get discoveries.”

If pharma is a business, they will find a way to develop, buy, or acquire new drugs. New technologies are being developed that allow for virtual clinical trials and other cost-lowering development costs. But even though the government may be saving money, ordinary taxpayers probably won’t see any discounts.

Prescription drug costs are only a small part of healthcare costs, and by 2028 U.S. healthcare spending will reach $6.2 trillion and account for almost 20% of the GDP. Several factors contribute to the higher cost of U.S. healthcare. Generally, healthcare prices are higher in the U.S. for professional services, hospitalizations, medical supplies, and drugs. Higher administrative costs in the U.S. account for one-quarter to one-third of all U.S. healthcare spending. They are estimated at $937 per capita, compared with $284 in Switzerland, $80 in the United Kingdom, and an OECD average of $173.

An analysis found that only 5.6% of hospitals were fully compliant with the new price transparency rule, with most failures centered on not posting payer-negotiated prices. Hospitals receive $1 out of every $3 spent on health care, and the United States is projected to spend about $1.3 trillion for hospital care alone in 2019. Collectively, hospitals boast a margin of 8 percent, a level higher than margins in the pharmacy industry or the insurance industry. Across America’s acute care hospitals, total revenues exceeded expenses by more than $64 billion in 2016, according to a Center for American Progress analysis. However, experiences among individual hospitals vary, and about one-quarter of both for-profit and not-for-profit hospitals lost money in 2016.

Then there is the cost of unhealthy Americans. A study put a price tag on American’s bad eating habits: $50 billion a year in health care costs, attributable to cardiometabolic diseases such as heart disease, stroke, and type 2 diabetes. The research, reported in the journal PLoS Medicineexternal link, sought to zero in on the national health care costs of unhealthy diet habits, accounting for up to 45% of all cardiometabolic deaths.

Then there is the cost of people who refuse to get vaccinated against COVID. While real-time data on the cost of all COVID-19 hospitalizations are not publicly available, various sources point to an average hospitalization cost of around $20,000. The Centers for Medicare and Medicaid Services (CMS) reports that Medicare fee-for-service COVID-19 hospitalizations average $24,033. Another study of Medicare fee-for-service enrollees found an average COVID-19 hospitalization cost of $21,752. A FAIR Health analysis of private claims data, including employer and private Medicare Advantage plans, found that COVID-19 hospitalization costs ranged from $17,094 for people over age 70 to $24,012 for people in their 50s. Similarly, our analysis of pre-pandemic private insurance claims for pneumonia hospitalizations with complications averaged $20,292 (though the cost for hospitalizations requiring a ventilator is much higher).

All this means is that America’s health care costs will continue to climb to record levels. What we should be asking is, “what is the government going to do with the money they save with Medicare negotiated prices?”.