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Friday, December 03, 2004

Why Drug Spending is Soaring

A friend directs me to an excellent critique of Marcia Angell's "The Truth About the Drug Companies," by Malcolm Gladwell in the New Yorker. There's lots of good stuff in the article, but one point that was new to me was the fact that spending on prescription drugs is rising rapidly not so much because of price increases for existing drugs, but because drugs are being more widely used, and because new drugs keep being discovered.

The second misconception about prices has to do with their importance in driving up over-all drug costs. In one three-year period in the mid-nineteen-nineties, for example, the amount of money spent in the United States on asthma medication increased by almost a hundred per cent. But none of that was due to an increase in the price of asthma drugs. It was largely the result of an increase in the prevalence of usage—that is, in the number of people who were given a diagnosis of the disease and who then bought drugs to treat it. Part of that hundred-per-cent increase was also the result of a change in what’s known as the intensity of drug use: in the mid-nineties, doctors were becoming far more aggressive in their attempts to prevent asthma attacks, and in those three years people with asthma went from filling about nine prescriptions a year to filling fourteen prescriptions a year. Last year, asthma costs jumped again, by twenty-six per cent, and price inflation played a role. But, once again, the big factor was prevalence. And this time around there was also a change in what’s called the therapeutic mix; in an attempt to fight the disease more effectively, physicians are switching many of their patients to newer, better, and more expensive drugs, like Merck’s Singulair.

Asthma is not an isolated case...All told, prescription-drug spending in the United States rose 9.1 per cent last year. Only three of those percentage points were due to price increases, however, which means that inflation was about the same in the drug sector as it was in the over-all economy. Angell’s book and almost every other account of the prescription-drug crisis take it for granted that cost increases are evidence of how we’ve been cheated by the industry. In fact, drug expenditures are rising rapidly in the United States not so much because we’re being charged more for prescription drugs but because more people are taking more medications in more expensive combinations. It’s not price that matters; it’s volume.

The source for much of this is probably IMS Health, a massive health industry consulting firm, although I couldn't find any recent figures from them (I did find a popular article by one of their executives with some nice charts). But figures from the BLS and CMS confirm the IMS story, at least in broad outline.

Over the last 10 years, per capita drug expenditures have more than tripled, while drug prices have gone up 47% and overall inflation has been 28%. The drug price index is for existing drugs, so it isn't affected when a cheap old drug is replaced by an expensive new drug.

In the end, I think Gladwell is mostly right, but not entirely. To the extent that drug spending is soaring because more people are getting access to needed drugs or because old drugs are being replaced with better ones, we probably shouldn't worry. But the part of the increase in the drug spending, according the Angell, is expensive new drugs that aren't any better than the cheap old ones they replace.


Wednesday, December 01, 2004

Social Security Shell Game

NYU Economist Nouriel Roubini has a detailed post explaining why the Bush administration's plan to partially privatize Social Security is a "con" and a "scam." Bush wants to allow workers to put part of their Social Security taxes into a private account. Of course this would create "transition costs," since the government would need to come up with extra money to pay current retirees. Details are sketchy, but it appears that Bush plans to finance the transition costs through borrowing.

The claim is that this scheme will somehow resolve Social Security's long-term shortfall. CNN quotes an administration flack as saying "It's important to view the financing of the transition as a down payment...If we fail to act, we face a $10 trillion gap."

The problem is that this plan doesn't actually do anything. It doesn't solve the funding gap, doesn't increase national savings, and doesn't increase national income.

That's because today's borrowing to fund the transition costs has to be paid back eventually through new taxes. In other words, the private accounts are illusory: they returns they generate will just go to pay the taxes for the borrowing used to fund them. Equivalently, the Bush plan is just a new tax, one that the government returns to workers in the form of private accounts.

What Bush gives with one hand, the private accounts, he (or some future, more responsible President) takes with the other in the form of higher taxes. The "ownership society," he calls it.

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