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Good News On Health Costs?

America’s perenially rising healthcare costs, as Via Meadia has noted many times before, are possibly the single greatest threat to the long-term fiscal health of the country. As the American population ages, rising health costs and the cost burdens associated with programs like Medicare threaten to demolish the budgets of state and federal governments alike.

There may be some new signs, however, that things are beginning to shift in the right direction. A recent Economist report noted that for the first time in decades, the growth in healthcare costs is slowing to the point where they are nearly matching GDP:

However the deceleration in spending is not entirely cyclical. David Knott and Rodney Zemmel of McKinsey point out that the rate of spending growth has declined for each of the past eight years. Three factors—drugs, hospital care and administrative costs—used to account for an outsized share of the growth. Since 2006, however, spending on each has slowed remarkably. Drug costs have fallen as products lose their patents. Big Pharma is not introducing new blockbusters as quickly as it is losing old ones. More and more services are moving from the hospital to less expensive clinics. Private health insurers are wringing efficiencies from their back offices.

It’s not entirely thrilling that costs are coming down because no fantastic but expensive new treatments aren’t being discovered, but a slightly-less-unsustainable health cost trajectory is good news. It will take time to determine whether this is a long-term shift or merely a brief respite from a continuing trend, and dramatic reforms to our healthcare system will be needed either way. Still, after years of unremittingly grim news on health costs, we will take any rays of sunshine we can get.

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  • Jacksonian Libertarian

    It’s the feedback of competition that makes the Free Enterprise system provide continuous improvements in Quality, Service, and Price. But when you separate buying decisions from the consumer, as the health insurance system does, you also interrupt the feedback and the improvements stop. What you are left with is unnecessary surgery, the prescription of dozens of unnecessary medications, simply all the waste, inefficiency, and bureaucracy, which characterizes the Government Monopoly.
    Look at how the Quality, Service, and Prices, have improved in those medical services that are not covered by insurance, like Lasik, or Cosmetic surgery.
    If the only health insurance available was the high deductable kind ($2,000) combined with the tax free health saving accounts, so that the consumer was spending his own money, Prices would drop, Quality would rise, and Service would improve.
    A slightly-less-unsustainable health cost trajectory is still unsustainable, and that which is unsustainable, will not be.

  • WigWag

    The pharmaceutical industry is in deep trouble and that should concern all of us. The fact that Pharma is no longer producing breakthrough medications is disturbing and signals that something is seriously amiss with the model that drug companies rely on.

    Disintermediation began to hit the pharmaceutical industry earlier than most industries; as far back as the early 1980s drug discovery was being driven by university based medical researchers who started their own biotech companies with venture dollars. Many of the most successful of these companies (Amgen and Genentech come to mind) were either bought out by large Pharma or have taken on the characteristics of large Pharma themselves.

    Perhaps the biggest problem these companies face is that the R&D it takes to produce an approved new medication is enormous and the costs are astronomical. For every new compound that ends up as a marketable product; hundreds fail.

    Pharma can no longer afford the significant R&D costs associated with new product development because the United States is the only country in the world where Pharma derives enough profit to plow back into drug discovery. The entire rest of the world pays only a slight premium over manufacturing costs (these costs are miniscule compared to R&D costs). But for the subsidy paid by American consumers and third party payers, there would be no pharma R&D at all. American drug costs are artificially high because the drug costs in the rest of the world are artificially low.

    This cannot last.

    Pharmaceutical products are actually the most important ingredient in lowering health care costs. How many hospitalizations and surgeries have been prevented by antihypertensive medicines and statins (e.g. Lipitor)? How much less expensive is the health care system as a whole because drugs that control blood sugar in diabetics prevents a tremendous number of hospitalizations?

    The fact that the Pharma model is now seriously broken will end up in the long run causing health care costs to rise and human suffering to rise right along with it.

    Something needs to be done.

  • jaed

    “Medical care is not getting better. New therapies are not being discovered, new devices are not being approved. Many of us will die sooner, and many of us will be sicker.

    “But costs aren’t going up as fast! So this is good news, right? Right???”

    This is, in other words, not good news.

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