Issues 2020: Drug Spending Is Reducing Health Care Costs

Even the costliest prescription drugs lower overall health care costs

NEW YORK, NY – Many presidential candidates cast pharmaceutical drug prices as gratuitously expensive and intentionally punitive—an example of corporate greed run amok. But the reality is that expensive prescriptions are not to blame for America’s steadily rising health care costs. In a new issue brief from the Manhattan Institute’s Issues 2020 series, senior fellow Chris Pope shows that drug spending actually lowers overall health care costs by more than offsetting those incurred for physician, hospital, and other services.

While it is true that American health care is expensive, only 12% of U.S. health care spending goes toward pharmaceuticals—a share smaller than in countries like Canada and Japan. The real driver of higher health care spending is skilled labor, which costs more in the U.S. than in other nations. Even the most expensive experimental drugs save Americans from these types of costs, including those incurred for surgery and other in-person care. (Consider, for example, the new drug Sovaldi, which treats Hepatitis C. Its $84,000 price tag may seem expensive, but it’s a bargain compared to a complication-prone liver transplant, which costs $577,000 on average.) And once these drugs go generic after the patent expires, they offer even heftier discounts.

Other key findings include:

• American households spend the smallest share of total consumption (0.4%) of any major developed nation on out-of-pocket fees for prescription drugs.
• From 2014 to 2018, savings from patent expiry totaled $51 billion, more than offsetting the $22 billion increase in spending due to price increases.
• Spending on specialty drugs has been increasing, but overall real per-capita spending on traditional drugs actually fell from $738 in 2008 to $527 in 2018.
• New drugs that offer previously impossible treatments seem expensive in the short term but save money in the long term by reducing the need for hospital and physician care.
• On average, an extra $100 in prescription drug utilization by Medicare beneficiaries saves $95 that would be spent on other medical services, while delivering better outcomes.

Click here to read the full report.

About Issues 2020

The Issues 2020 series applies the Manhattan Institute’s breadth and depth of expertise on major issues of national public policy to the key arguments and proposals of the 2020 presidential campaigns. MI scholars identify where the central claims driving key debates reflect fundamental misunderstandings about what is happening in America. With succinct explanations of what the data show, they provide a much-needed corrective and a solid foundation for political debates about the nation’s future. Click here to read more.