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The US Has a Health Care Pricing Problem

By January 31, 2024Commentary

The United States spends a lot of money on health care.  At a gross level health care spending has two components–what services and products are used and how much each product or service costs.  For some bizarre reason, a lot of attention has been focused on the utilization piece and not so much on the price piece.  The fact is that the US doesn’t have much of a utilization problem; we actually are pretty efficient, we don’t use hospitalization a lot and health plans are fairly vigilant about overuse of services and products that aren’t necessary or very effective.  We do have a population health issue that causes more utilization than occurs in countries with better health habits, but that is a separate issue.  For the same condition, our utilization is very good.

Pricing, however, is a different issue, and is the real cause of why we spend so much more per capita than do other developed countries.   The costs for physician services, hospital services and drugs are far higher here than elsewhere.  Doctors, particularly specialists, have very high salaries.  Hospitals have excessive administrative staff and they pay management extremely high compensation.  Drugs are priced at absurd levels.  This article from the Journal of the American Medical Association focuses on drugs received from hospitals.

These facilities are particularly abusive in regard to infused drugs for cancer, arthritis and other conditions.  They charge multiples of what the drug cost them.  These are very expensive drugs–often $100,000 or more a year.  So marking them up a huge amount is very profitable and very costly to the health system. This is particularly egregious because they use another federal program, called 340B, to get the drugs at a big discount.  The research found that the hospitals on average charge THREE TIMES what it cost them to buy the drug.  They charge on average SIX TIMES more than obtaining the same infused drug in a doctor’s office.  This is simply despicable and outrageous and Congress should be ashamed of itself for not limiting markups.

This is a perfect example of our pricing issues.  We won’t get health spending under control until we limit prices.  (JAMA Article)


Join the discussion 4 Comments

  • Ann in L.A. says:

    Take a look at Table 3 in the NEJM article. It shows that, whether the hospital meets the criteria for 340B discounts or not, they charge $633-$650 more than private practices, with the discount-eligible providers only charging $17 on average more.

    In other words, hospitals are all charging about the same thing for the same drug, whether they purchase it at a discount or not. (I’d like to see absolute numbers here: all the numbers in the article are presented as relative to something else. )

    To me, it’s not at all surprising that a hospital would pocket the subsidy/discount.

    In 2022 Biden’s Inflation (causing) Reduction Act included a $7500 subsidy to buy an EV. Pretty much immediately, every manufacturer jacked up the prices or their EVs roughly the same amount, so that *they*, and not the customer, would pocket the money.

    After all, if the payer is willing to pay a certain amount, why should the seller offer it for less, just because the government is offering a subsidy? Prices are ultimately determined by how much the purchaser is willing to pay, not the costs or any inherent value of the item.

    For the article, it is clear that the payers–here the insurance companies–are willing to pay the $633-$650 more for hospital-based than for physician-office based infusions. This comes down to the contract negotiations between the insurance companies and the hospitals, and down to the cost-shifting hospitals must engage in to pay for the care they offer to seniors and the indigent below the cost of that care.

    That’s something that falls far more on hospitals than on private practices, since they have to maintain things like ERs and IP wards.

    • Kevin Roche says:

      No, the hospitals all have excessive market power and require that these treatments must take place in their outpatient facilities, or they have bought up all the independent practices so there is no competition. No insurer would agree to this if they could avoid it. And hospitals are enormously profitable, especially the supposedly non-profit ones and they routinely fail to meet their obligations to provide indigent care. I have posted on the research demonstrating this.

  • Ann in L.A. says:

    As for overall drug pricing in the US being so much higher than in comparable countries, I’d flip that around and question why other developed countries have drug prices so much less than we do. Someone has to pay for the drug development costs, and it is clear that is falling disproportionately on the US health care system. (Echoes of NATO.)

    So they goal would be to get other countries to pay more of their fair share, so the US isn’t left picking up the tab.

    I would like to see someone do an analysis of the following: in order to give drug manufacturers more bargaining power abroad, the US should regulate that prices in the US can not be more than 5-10% above the prices in countries such as Canada, Australia, New Zealand, Japan, South Korea, and the EU. (You’d have to create some kind of an averaging process for the other countries’ prices.)

    That way, when drug companies go to negotiate, they would have a floor below which they can not fall and still stay in business. They couldn’t just agree to cut-rate prices overseas, then take it back out of the pockets of the American consumer and the US federal tax payer.

    • Kevin Roche says:

      It is a myth that drug development costs are why prices are high here. Other countries’ prices reflect drug development costs to the same extent as the US, they just don’t have the excessive marketing and sales and profit components that we do in the US. Look at any big drug companies 10K report with the financials and you can see what causes the high prices. Look at how much more is spent on sales and marketing than R & D.

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