Drugs not the culprit in health costs: Research shows that medicare's financial problems aren't caused by what we buy

B.C. doctors have called on the province to curb spending on prescription drugs. The docs say annual spending increases are unsustainable. The Health Minister has toyed with imposing a cap on public drug budgets. But these folks have their facts seriously wrong.

Why focus only on drug budgets? What about other types of health spending, like the money spent on physicians and hospitals?

It’s no secret that in total, provincial health spending across Canada is not sustainable, and this drives concern about costs. But neither the cost of patented medicines (newly developed drugs) in particular, nor prescription drugs in general can be blamed for the failure of our provincial health insurance monopolies to remain financially sustainable.

Patented prescription drugs simply account for too small a percentage of public spending on health care to be causing Medicare’s financial unsustainability. In 2005, patented and non-patented prescription drugs together accounted for only 9.6 per cent of government spending on health care. But, patented prescription drugs in particular only accounted for an estimated 6.8 per cent share - and much less in previous years.

If it were true that drug spending is to blame for unsustainable growth in government health spending, then it stands to reason that if we spent nothing at all on drugs, all other health expenditures would be growing at sustainable rates. But in fact from 2001 to 2005, across Canada, average annual provincial spending on health professionals grew by 6.5 per cent. Spending on hospitals and institutions grew by 7 per cent per year. And spending on government health, administration, research and other areas grew by 7.8 per cent annually. These growth rates are between 1.3 and 1.6 times faster than GDP growth (5 per cent) and between 1.4 and 1.7 times faster than the growth in total provincial revenues from all sources (4.5 per cent).

And these non-drug components of health spending collectively accounted for between 90.4 and 91.8 per cent of total provincial health spending during the period.

This means that even if governments spent zero on drugs, spending on all other medical goods and services would still be rising at an unsustainable rate. The fact that other medical goods and services make up more than 90 per cent of government health spending strongly suggests that efforts to contain health care costs by targeting drugs are seriously misguided.

And if drug spending was causing Medicare to be financially unsustainable, then we would expect to see increasing annual rates of growth in total government health spending over time as the proportion going to drugs increases. But research shows no link between changes in the annual growth rate of health spending and the increasing proportion of health budgets going to drugs.

Neither is price inflation for new patented drugs to blame for Medicare’s financial problems. After adjusting for general inflation, prices for existing patented medicines have declined in real terms in 16 of the last 18 years.

Introductory prices for new patented medicines in Canada are lower than those in the majority of the countries that the federal government uses for international comparisons and far below U.S. prices for identical drugs. Canadian prices for patented drugs are on average 43 per cent lower than U.S. prices for identical drugs.

So why are drugs attracting a rising share of total public health expenditures? It’s because of the discovery of new drug treatments that did not previously exist, and the increasing use of drugs to replace or complement other forms of medical treatment. But these are positive developments that lead to improvements in human health and can produce net cost savings when all health spending is accounted for.

The facts show that hospitalization rates have declined at the same time that drug spending has increased as a percentage of total public spending on health in Canada. Research also shows that provinces that spend a larger proportion of their health budget on drugs have slower overall growth rates in health costs. These correlations are broadly consistent with a broad body of research showing that drugs are a cost-efficient substitute for other treatment alternatives requiring hospitalization.

Medicare is financially unsustainable because it promises to pay for everything for everybody without any price at the point of consumption. The price of medical treatment or the introduction of new medical technologies like patented medicines is not to blame. Medicare’s financial problems are not caused by what we buy with our health care dollars but by how we pay for it. Abolish the government monopoly over health insurance and health expenditures will be sustainable.