By David R. Francis
It is no secret to Americans that healthcare
costs are soaring. But some of the causes of this escalation are
startling. For example:
- Drug companies spend roughly as much
on advertising and promotion - $20 billion a year - as they do
on research and development of new drugs.
- Overall, American pharmaceutical firms
employ one sales person for every physician in the country. They
also pick up the tab for doctors to attend seminars promoting their
products, which happen to take place in desirable locations, such
as Florida and the Caribbean.
- New technology - from diagnostic devices
to surgical techniques - accounts for more than half the rise in
total healthcare spending in the past three years, says Andrew
Tilton, an economist at Goldman Sachs, an investment bank in New
York.
- Despite rising costs, profit margins
on healthcare products and services, including health insurance,
have been going up - rapidly - rather than down. Mr. Tilton says
mergers have increased providers' pricing power.
Even before the new Medicare law extending
prescription-drug benefits, experts had forecast higher costs ahead.
The rising cost of healthcare affects all Americans, whether or not
they make much use of the medical system. It means they have less
to spend elsewhere.
" [Soaring US costs] just can't go
on much longer," says Paul Ginsburg, president of the Center
for Studying Health System Change (HSC) in Washington, D.C. "Things
will happen."
The latest cost numbers indicate the
growing economic challenge.
Already the nation is spending about
$1.65 trillion a year on healthcare. That represents 15 percent of
gross domestic product, the total output of goods and services. It
consumes one-fourth of the federal budget, more than defense.
By comparison, Canada spends about 10
percent of GDP on a universal, government-run healthcare system.
Further, Canadians live a bit longer on average than Americans. That
suggests lower costs haven't damaged the health of Canadians.
Outpacing inflation
Surveying nearly 3,000 employers, Mercer
Human Resource Consulting finds that their health-benefit costs rose
10.1 percent this year, while inflation hovered around 2 percent.
(See chart.)
The cost increase is less than the nearly
15 percent rise in 2002. But it still means that costs for each active
employee, including all medical and dental plans offered, rose from
$5,645 in 2002 to $6,215 in 2003.
Using a broader database that covers
individual costs as well, the Center for Studying Health System Change
(HSC) in Washington, reckons that healthcare expenses per privately
insured American slowed in the first half of 2003 to a 8.5 percent
increase from a 10 percent rise in the second half of 2002. That
includes hospital inpatient and outpatient services, physicians,
and - rising fastest of all in recent years - prescription-drug costs.
As costs spiral upward, more and more
Americans are being priced out of the healthcare market.
Rising number of uninsured
The latest statistics show 44 million
Americans are not covered by any health insurance. This number is
likely to increase as costs rise further.
Higher costs discourage employers, especially
small businesses, from providing health benefits to employees. And
since employers are already boosting the cost to employees of health
benefits, fewer workers will enroll in their firms' health plans.
In smaller companies, only 48 percent of employees elect family coverage, down
from 51 percent in 2002. The $359 average monthly bill for HMO coverage is
just too much for many, and it's getting worse.
The Mercer survey found that employee
contributions, especially for family coverage, rose sharply in 2003.
In the three previous years, employers had passed on to employees
only a portion of cost increases. This year, "employers took
back the lost ground," says Mercer consultant Blaine Bos.
Critics say the new Medicare drug benefit
will tempt more companies to drop their coverage of retirees, despite
new subsidies to encourage continuation. The benefit, though primarily
shifting drug costs from individuals to the federal government, is
expected to add to overall drug consumption.
The cost of bringing a single new drug
to market has risen to about $1.7 billion, calculates Bain & Co.,
a Boston consulting firm. That's up from $1.1 billion from 1995 to
2000. These totals involve commercialization costs, such as preparing
marketing materials.
Marketing that informs?
Drug companies defend their marketing
expenses as educational, saying doctors have little spare time to
inform themselves of the latest advances.
But "nobody wants to be educated
by somebody who wants to sell them something," says Arthur Caplan,
a bioethicist at the University of Pennsylvania. He calls the seminars "small-scale
bribery."
What's to be done about rising medical
costs? Here are some suggestions by experts, not all politically
easy to obtain:
- Provide more information to consumers
on what drug works, what procedures are best, which hospitals and
physicians have good records. Insurance, for instance, shouldn't
cover extra costs if a patient uses a brand-name drug when a cheaper
generic does the job.
- Cut off expensive treatment if it
extends someone's life only a few days or months.
- Spend more on prevention of disease
by encouraging better lifestyles, improved nutrition, and other
steps.
- Ban or control the advertising of
prescription drugs to consumers. The "hype" in the ads
that pepper the evening news and other programs has swelled drug
sales and taken up physicians' time, suggests Mr. Caplan. But there
is little indication that the extra drug consumption has improved
health by much.
- Cap malpractice awards so doctors
need not prescribe so many tests and other defensive practices.
- Let HMOs and other healthcare providers
return to tighter management of costs, procedures that worked in
the 1990s but were abandoned after severe criticism by customers
and the press.
