What’s Really Wrong with American Health Care

Published November 1, 2005

A Call to Action: Taking Back Healthcare for Future Generations
by Hank A. McKinnell (New York, NY: McGraw-Hill, 2005)
256 pages, $27.95, ISBN 007144808X

In his new book, A Call to Action: Taking Back Healthcare for Future Generations, Hank McKinnell, chairman of drug maker Pfizer and chairman emeritus of Pharmaceutical Research and Manufacturers of America, attempts to answer the question that beleaguers the drug industry today: Why are prescription drugs so expensive in the United States?

Drug makers like to say new drugs must be expensive in order to recoup the high cost of research and development. Rather than perpetuate that overly simplistic view, McKinnell explains that once funds are spent, research and development is a sunk cost. Firms do not make pricing decisions based on past expenditures. Instead, they price products based on current conditions and future opportunities.

But incentives still matter, McKinnell notes: Drug companies won’t hunt for new drug molecules if price controls undermine their profit potential.

Marketing Not the Culprit

McKinnell dismisses the notion that marketing costs increase the price Americans pay for drugs. Drug marketing, he writes, is mostly used to educate physicians (and patients) about products and provide free drug samples to patients.

Moreover, he notes, drug prices are not high compared to their value. Increasingly, drug therapies substitute for more expensive surgeries requiring hospitalization.

Despite that substitution effect, drugs are not consuming a bigger share of U.S. health care resources than in the past. The proportion of health care dollars spent on medicines is about 10 percent–essentially unchanged from four decades ago.

Prices Fall Over Time

To those who complain new drugs are unaffordable, McKinnell explains that the prices of innovative drugs fall over the long term. In 1993, the average wholesale price of the 10 best-selling drugs was $44 per monthly prescription. A decade later, nine of the 10 had gone off patent, and the price had fallen by 75 percent, to about $11. Although Americans pay higher prices for name-brand drugs than citizens in other developed countries do, we pay lower prices for off-patent (generic) drugs.

The reason brand-name drugs are cheaper abroad is because countries such as Britain and Canada essentially free-ride on our research and development. These countries use price controls to force down the cost of patented drugs–something U.S. trade negotiations should address, McKinnell writes.

“We rely on competition to keep prices down on everything we consume, from food to shoes to banking to laundry services,” McKinnell points out. “Competition is good medicine for economies. Besides lowering costs, competition improves quality and encourages innovation.”

Consumer-Driven Incentives Work

McKinnell’s prescription for the U.S. health care system is to empower patients through consumer-driven health care. His recurring theme throughout the book is that appropriate incentives should encourage responsibility and cost control.

For example, he notes more uninsured families would purchase health coverage if they were given the right incentives. One possible solution is a tax credit that would provide low-income workers a subsidy closer to the tax exemption middle-income families enjoy.

“[T]he cornerstone of healthcare reform is to empower consumers of health services with as much information and market power as possible,” McKinnell writes. “The best way I know to create empowered patients is though the creation of incentivized personal health accounts that unleash the benefits of an ownership society.”

Consumer-driven health plans, such as health savings accounts (HSAs), provide patients with the needed incentives to be wise consumers of medical services, McKinnell argues. When patients understand the benefits of healthy behaviors, they will be more likely to engage in prevention rather than waiting until problems arise. This includes knowing (and understanding) their own health metrics, such as cholesterol, blood pressure, and blood glucose.

Tax Break Created Problems

The U.S. health care system is dominated by third parties more concerned with treating illness than preventing it, McKinnell notes. A Call to Action challenges Americans to take back control of their own health from these third parties.

In describing how the United States arrived in the current predicament, McKinnell accurately lays the blame on decisions made 60 years ago. The tax exclusion for employer-sponsored health insurance enacted after World War II meant workers were required to pay taxes on cash wages but not on fringe benefits such as health insurance. Over time it became common for workers to fund their families’ health care using insurance policies obtained through employment.

The adverse effect third-party payments have on the price of medical services was predictable. Less obvious is the loss of patient autonomy that occurs when third parties control health care dollars. The inevitable result is that third parties will tend to ration care by providing care only to the sick rather than investing in disease prevention.

The book’s central theme–that individual patients, not bureaucracies, hold the key to reforming health care–may help Americans focus increasingly on preventing costly diseases rather than fixating on the high cost of health care.

Devon M. Herrick, Ph.D. ([email protected]) is a health economist and senior fellow at the National Center for Policy Analysis.