Politicians' Narrow Focus On Prescription Drug Spending Is Myopic

House Minority Leader Nancy Pelosi, reacts after voting results during a House Democratic election night event in Washington, D.C., U.S., on Tuesday, Nov. 6, 2018. Photographer: Yuri Gripas/Bloomberg

© 2018 Bloomberg Finance LP

On election night House minority leader Pelosi and President Trump had a phone call in which they discussed possible areas of cooperation. Specifically, they mentioned funding for infrastructure and curbing of prescription drug spending. In an era where bipartisanship is sorely lacking, it's good that common ground is being sought. But, it does raise the question why when it comes to healthcare the exclusive focus would be placed on containment of prescription drug spending.

National health expenditure growth is expected to average 5.5% annually over 2017-2026. The facts on hospital inpatient, physician, and prescription drug spending indicate that all three are drivers of higher healthcare spending.

Among the major sectors of healthcare, prescription spending growth is projected to be 6.3% on average annually for the 2017-2026 period. This is less than growth in home health spending, and only slightly above expenditure growth in both hospital care and physician services.

When addressing healthcare spending it's essential to keep in mind the shares each sector currently has relative to overall healthcare expenditures, and the projected share in 2026, as shown in the table below.

Share of overall healthcare spending

2018                  2026

Growth in spending, 2018-2026
Hospital care 32% 32% 55%
Physician services 20% 20% 51%
Prescription drug spending* 10% 11% 67%

Data source: Centers for Medicare and Medicare Services.

* The Office of the Assistant Secretary for Planning and Evaluation estimate of prescription drug spending is higher (16%), because it includes "non-retail prescription drugs," or hospital and physician-administered drugs.

The share of retail outpatient prescription drug spending is about half of physician services, and one-third of hospital care. Even if one includes hospital and physician-administered drugs, the proportion of dollars spent on prescription drugs is about 75% of physician services, and half of hospital care.

Over the next eight years cumulative growth in prescription drug spending is expected to be somewhat higher than the other two sectors. However, the relative shares of spending will remain approximately the same.

What matters to patients is how much money is being spent out-of-pocket on healthcare. The table below shows average per capita out-of-pocket spending, and growth in such spending over the next decade, by healthcare sector.

Average per capita out-of-pocket spending

2016                      2026

Growth in out-of-pocket spending, 2016-2026
Hospital care* $101 $148 44%
Physician services $183 $260 42%
Prescription drug spending $140 $202 46%

Data source: Centers for Medicare and Medicaid Services

* For hospital care, the average per capita amount of out-of-pocket spending is not an especially helpful number, as in a given year the vast majority of people are not hospitalized, yet most people do visit physicians and take prescription drugs.

It's observed that there will be roughly the same growth in out-of-pocket spending across the three sectors. But, patients will shell out more for physician services than prescription drugs. Additionally, patients currently pay an average of $1,000 out-of-pocket per hospital stay, and this will increase apace with hospital care expenditures.

In sum, if the intent is to bend the healthcare cost curve, politicians and policymakers must address growth in expenditures across healthcare sectors, and not narrowly focus on prescription drug spending.

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I'm an independent healthcare analyst with over 20 years of experience analyzing healthcare and pharmaceuticals. Specifically, I analyze the value (costs and benefits) o...