How Government Made US Healthcare Expensive
By: Libertarian Minarchist
Tags: Economy, Politics, Policy, Healthcare, Economics

It has to do with decades of bad public policy

Photo found at pexels.com

Healthcare policy and reform is one of the most important issues in the United States today. President-elect Joe Biden has proposed a healthcare plan that would give Americans the ability “to purchase a public health insurance option like Medicare.” Biden and his team believe that this would reduce health related expenditures due to the cheaper prices offered by the public option.

The main problem with Biden’s plan is that it mostly doesn’t address what made the American healthcare system expensive in the first place. I will be going over the several factors that made the United States healthcare system the most expensive in the world.

1. Lack of competition in the Pharmaceutical Industry

The government heavily protects drug manufacturers from competition. The problem is so widespread and costly that Biden even addresses it in his plan:

To create more competition for U.S. drug corporations, Biden will allow consumers to import prescription drugs from other countries, as long as the U.S. Department of Health and Human Services has certified that those drugs are safe.

The benefits of such a policy if implemented would be immense. A major reason why prescription drugs are priced so high in the US is due to the lack of market competition in the pharmaceutical industry. The reason for the lack of competition is due to patent applications that the government provides to pharmaceutical companies which delay competition and increase prices. The empirical evidence on this matter does validate this claim.

A 2018 report from the Initiative for Medicines Access and Knowledge looked at several of the highest selling drugs in the US and the amount of patent applications that were filed by the drug manufacturers:

Such filings allow drugmakers to a) increase the price of the branded drugs by an average of 68% in six years, and b) seek to stall generic competition by an average of 38 years. While these average figures are disconcerting, examples among specific drugs run even more extreme in each category. Among the top grossing and best known drugs on the market today, some of the ‘worst offenders’ include AbbVie having filed 247 patent applications for Humira, Pfizer’s 163% price hike over six years for Lyrica, and Roche’s and Genentech’s efforts to seek 48 years of patent exclusivity for Herceptin. These examples are not outliers; our analysis indicates that patent holders for the other top twelve drugs also abuse the patent system, hike the price of drugs, and delay generic competition.

Drug manufacturers use patent applications that the government provides to delay generic competition and increase prices, leading to commercial monopolies and increased prices for the consumer. In fact, high prescription drug prices are one of the leading causes of the expensive healthcare system America has today.

What would be the potential savings from patent reform? A study from the National Bureau of Economic Research looked at the Waxman-Hatch Act of 1984 and the effects it had on drug prices and R&D investments. One potential downside to patent reform is that it could reduce investments in medicinal research because of decrease in future profits from the drug research. The Waxman-Hatch Act tried to solve this problem by balancing out market exclusivity and expanding generic competition.

The study concludes that following generic entry into the market, prices fall dramatically.

Our analysis finds that in each of nine major therapy areas average pharmaceutical treatment costs have declined, in some cases very dramatically (in one therapeutic class, 84.1%) following generic entry. These cost declines encompass the entire set of molecules within each therapeutic class, not simply the molecule whose patent has expired. Across all nine therapeutic areas, at 24 months post‐generic entry, the weighted mean reduction in pharmaceutical treatment cost is 35.1%.

But the problem with the Waxman-Hatch Act is that it granted drug manufacturers a five-year period in which they had market exclusivity over the new drug, which meant that the FDA could not approve a generic version of that drug.

The intent of such a provision in the Waxman-Hatch Act was to allow private investments in medical research to remain steady. One common defense of broad patent rights in drug manufacturing is that it allows for large scale private investment in medicinal innovation.

However, the new incentives for companies to manufacture generic drugs created in the Waxman-Hatch Act did prove to be mostly successful. The study showed above proved that following generic entry into the market, prices fell substantially.

Further reform needs to be done that allows for further generic entry into the market while maintaining incentives so that companies can continue to invest and innovate. With such reform, prices will drop due to increased price competition while continuing large-scale investment in medical research.