A Better Prescription for Medicare

By Robert Goldberg, Director of the Manhattan Institute's Center for Medical Progress

(May 7, 2002) - This month, Congress begins again to try to add a drug benefit to Medicare. Yet rather than reform Medicare to capitalize on the health benefits and cost savings associated with the consumption of new medicines, Congress is focusing on cost containment, and little else.

Both Republican and Democrat proposals would provide an entitlement to the wealthiest seniors and bail out the drug plans of large corporations. In this dubious context, the cost controls in either drug benefit seem reasonable enough. They are, after all, modeled on the "best practices" found in the private sector: Use generic drugs first before giving people the newest drug. Limit access to new drugs to the one product that gives the lowest price, and have people pay more for it. Require doctors to obtain bureaucratic approval before using new drugs. That way, politicians can offer more people the same quality of care for less money.

Human Affairs

Such proposals ignore the huge advances made in medicine and the improvements medicines have made in health care and human affairs. As spending on prescription drugs has increased and the rate of consumption quickened, health care spending on hospitals and physicians has actually decreased, even as research has allowed people with diseases to live longer or -- in cases of AIDS, certain forms of cancer, or rare childhood disorders -- to live at all.

In 1960, Americans spent 10% of their healthcare dollar on medicines. Most of the money came from their own pockets, and was spent on drugs that largely treated infections, heart disease, arthritis and depression. Beyond that, there was little that science could offer. Today, the range of diseases for which medical research has some partial treatment is vast. Despite this, and the double digit increase in drug spending -- 75%-90% of which is paid for by insurance companies -- prescription drugs now account for 9% of total health expenditures.

Similarly, claims by insurers and corporations -- that drug costs are driving insurance costs up in general -- are overstated. According to health analyst J.D. Kleinke, since pharmacy costs represent only 9% of all spending, even increases of 20% could not be responsible for insurance premium increases of 10%-15% over the last two years: Premiums have been increasing far out of proportion to increasing total medical costs over the past three years.

The fact is, we should spend more on newer, more expensive medicines because they are worth the investment. Medical innovation creates what Harvard economist David Cutler calls health capital -- the ability of people to stay well early and consistently throughout their lives, and remain that way at an increasingly older age. In fact, under the most conservative assumption, the U.S. would have needed only about 30% of the improvement in health capital that it received in the past 40 years to justify the spending in medical progress over the period in time. In the case of congestive heart failure, Mr. Cutler found that increased consumption of new and more expensive drugs and other innovative technologies generated longer life, more productivity and lower health costs that offset the cost of their development and consumption.

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Similarly, a study by Columbia professor Frank Lichtenberg found that hospital stays, bed-days, and surgical procedures declined fastest for patients with the greatest increase in the total number of drugs prescribed, as well as the greatest change in the use of new drugs. An increase of 100 prescriptions is associated with 1.48 fewer hospital admissions, 16.3 fewer hospital days, and 3.36 fewer inpatient surgical procedures. A $1 increase in pharmaceutical expenditure is associated with about a $4 reduction in other health expenditures.

Mr. Lichtenberg also found that "in the absence of pharmaceutical innovation, there would have been no increase and perhaps even a small decrease in mean age at death, and that new drugs have increased life expectancy, and lifetime income, by about 0.75%-1% per annum. Some of the more conservative estimates imply that a one-time R&D expenditure of about $15 billion subsequently saves 1.6 million life-years per year, whose annual value is about $27 billion."

By contrast, efforts to control drug costs by limiting use of newer medicines will come at the expense of people's well-being and increase total health care spending. For example, New Hampshire's cap of three prescriptions a month for schizophrenia patients in 1991 saved an average of $47 a year in drug costs for each patient, but added $1,530 in other health-care services.

Restricting access to new drugs through mandatory generic substitution and requiring people to pay more for new drugs have a similar effect. A 1996 study of 13,000 patients from six HMOs found that the more restrictive the formulary, the more patients used other, more expensive services such as emergency rooms, hospitals and doctor visits. Seniors were twice as likely to be hospitalized or go to the ER when faced with such restrictions compared to younger patients.

Many policy makers want to use the restrictive formularies of the Department of Veterans Affairs to save money in any Medicare drug plan. This approach, limiting access to drugs which are the cheapest, often forces patients to "fail" on older medicines before they get a crack at newer drugs. Though studies show that such patients hospitalized for schizophrenia have a better quality of life under newer drugs, an older drug is often on the formulary. Also, patients are limited to one new schizophrenia drug by virtue of price alone in the face of evidence that individuals respond differently to different drugs.

Medical Progress

Ideology, not science, drives this policy dysfunction. Restricting access to new drugs is based on the assumption that it is the thirst for profit, not medical progress, that drives the use of new medicines. Policy makers and consumer groups believe new drug development is a marketing mirage that could easily be replaced by a combination of government supply depots, federal research labs and generic drug firms.

Yet is an entitlement rife with cheap drugs and restrictions, and shorn of breakthroughs, a substitute for spending more on medicines that extend the boundaries of health? Since no one seems interested in finding ways to increase coverage and consumption of new medicines without such controls, we may soon find out.

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