Category: Health Care Costs

To Reduce Drug Prices, Solve R&D Crisis

A new NCPA study concludes that Congress must act to reduce the regulatory burden on pharmaceutical research and development.

Reducing the prices of specialty drugs requires improving the productivity of research and development (R&D). On that front, the news is sobering. Last December, Deloitte and Thomson Reuters examined newly introduced drugs from the 12 pharmaceutical companies with the largest R&D budgets.5 They found it cost $1.3 billion to bring one of these new compounds to market. However, the peak sales forecast for each of these drugs declined by 43 percent, dropping from an average of $816 million in 2010 to $466 million in 2013.

The high nominal prices of new drugs do not compensate for the smaller patient populations they target. Deloitte and Thompson Reuters estimate the internal rate of return (IRR) of R&D spending has dropped in half since 2010, from 10.5 percent to 4.8 percent. Sales of new drugs are not overcoming the loss of patents, weak pricing power for older drugs, or the reduced productivity of R&D.

The Fall of Government Unions And Slowing Health Costs

An op-ed in the Wall Street Journal (available by subscription) about a recent legal decision on retiree health benefits shines the light on is a reason for optimism about the slow growth in health spending.

As readers know, I look pretty closely at the economic data from various government agencies, and they are starting to show an uptick in health spending and prices. However, a recent Supreme Court decision weakens the power of government unions to demand exorbitant retiree health benefits, according to Robert C. Pozen and Ronald J. Gilson.

Health Spending Chews Through A Weak Economy

Today’s second estimate of fourth quarter Gross Domestic Product (GDP) confirmed what we pointed out from the initial estimate released on January 30: Health spending is chewing up more and more of the weakening economic recovery.

GDP growth was actually revised down from the initial estimate of 2.6 percent to a second estimate of just 2.2 percent. In dollar terms, it was a drop from $106 billion to just $88.1 billion.

Health spending, initially estimated at $20.4 billion was tweaked up a little to $21.4 billion. In other words, health spending devoured one quarter of GDP growth in the fourth quarter.

These are the wages of Obamacare: An increasing share of our prosperity diverted to a health sector that is increasingly frustrating to patients and physicians alike.

Prices for Health Goods Rallying

As the economy slowly crawls its way back towards growth, inflation is well under control. However, healthcare inflation is rearing its head. Table 1 presents data from the February release of the Producer Price Index.

Over the last twelve months through January, producer prices increased by zilch, and actually decreased since last December. Prices of goods for final demand actually dropped 3.7 percent over the year. Pharmaceutical preparations, however, increased by 7.3 percent, and other healthcare goods also had higher inflation than other goods for final demand (which, I hate to state, also weakens the argument that the medical-device excise tax is having as negative an effect as the industry claims).

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Consumer-Driven Childbirth in the New Bronze Age

Birth rates fall during economic downturns — especially among lower-income women. A 2012 study found that birth rates declined 8% during the recession from 2007 to 2010. Presumably this was due to economic uncertainly, but could also be attributed to cost-sharing for a major medical event.

The out-of-pocket cost of having a baby is going up. High-deductible health plans (HDHPs) and their “Bronze” counterparts in Obamacare exchanges are expected to be the most common insurance arrangements for expectant mothers in the near future. A recent JAMA article  discusses the implications of high-deductible health plans and rising out-of-pocket costs on expectant mothers.

Childbirth is the most frequent reason for hospitalization in the United States. Although Obamacare mandates that insurers cover birth hospitalizations, its only limit on cost-sharing is through relatively high annual out-of-pocket maximums. According to the article:

Health Care Spending is Up, Way Up

The economic data on health spending has been bouncing around like crazy in the age of Obamacare, so we must not read too much into one report. Nevertheless, the January 30 report on Gross Domestic Product (GDP) issued by the Bureau of Economic Analysis indicates that health spending has begun to race up again, despite moderate economic growth.

Last week’s report contains the final estimate of 3rd quarter GDP and the advance estimate of 4th quarter GDP for 2014. As noted in my comment on the December release, real GDP growth in the 3rd quarter was strong: 5 percent annualized, and this was confirmed in the January report. However, growth for the 4th quarter was significantly slower, just 2.6 percent annualized.

Last Week’s GDP Estimate Included a Massive Upward Revision in Health Spending

Due to the Christmas break, we did not discuss last week’s third estimate of 3rd quarter GDP when it was released on December 23. The media noted the big headline jump in the real (inflation-adjusted) increase in GDP, from a 3.9 percent in the second estimate to 5.0 percent in the third estimate.

November’s second estimate of 3rd quarter GDP included moderate health spending growth. The third estimate blows that out of the water. Much of the upward revision to the GDP estimate was due to health spending.

The real dollar change in seasonally adjusted GDP (at annual rates) from the 2nd quarter to the 3rd quarter was estimated at $153.7 billion in the second estimate. The third estimate revised this up to $195.2 billion, a change of $41.5 billion (27 percent).

Politicians are Getting Goofy on Generic Drugs

Last month, I noted that prices for some generic drugs have been rising to great heights, inexplicably, and that politicians are trying to find out why. Well, even though we don’t quite know why, politicians are considering very harmful legislation to put a stop to it.

Scott Gottlieb, MD, has prepared a sober analysis of the causes of these price hikes. Dr. Gottlieb notes that prices of most generic drugs remain low: Only about one third of generic drugs have experience price hikes, and only a very small number have experienced very large price hikes. Like me, Dr. Gottlieb suspects that the price hikes are associated with manufacturing problems caused by lack of ingredients or regulatory interference with production. This causes the number of competitors to shrink. Dr. Gottlieb also points to recent government action that will likely increase prices of generic drugs across the board, especially a new FDA labeling rule that exposes generic drug-makers to increased tort liability.

Real Health Spending Continues Moderate Growth

The Bureau of Economic Analysis released its second estimate of 3rd quarter GDP and it confirms what was observed in the advanced estimate: Real growth in health spending is moderate.

Indeed, real GDP growth was revised upwards from 3.5 percent to 3.9 percent, but health spending was not really changed from the advanced estimate. In chained (2009) dollars, GDP grew by $153.7 billion in the 3rd quarter, but health care comprised only 8.6 billion of that growth (Table 3). If we go back before Obamacare kicked into high gear, the increase from the 3rd to 4th quarters in 2013 was $18.7 billion — more than twice as much, and both figures are seasonally adjusted.

Premiums Hiked 10 Percent for Most Popular Obamacare Plans

Consultants at Avalere have confirmed that which I previously suggested: Obamacare plans that won market share in 2014 are hiking their premiums significantly. Here’s a vignette:

In 2014, Jane enrolled in the lowest cost silver plan in her region with a $318 monthly premium. Jane earns approximately $17,500 a year (150 percent of the federal poverty level) and qualifies for a subsidy that caps her monthly premium at 4 percent of income.  Because the plan she purchased was priced below the benchmark used to calculate subsidies, Jane pays only $18 a month for insurance in 2014.

 In 2015, Jane does not go back to the exchange to re-enroll in coverage and instead is renewed automatically in her existing plan, which has a new premium of $380. While her premium has increased, Jane’s monthly subsidy will be the same as in 2014, $300. This means Jane will pay $80 a month for insurance, a nearly 400 percent increase over 2014. While Jane’s eligibility for premium tax credits will be reconciled when she files her tax returns in April 2016, Jane will experience higher monthly costs until she receives her refund.