The Misguided War Against Medicines

Since 2000, at least five provincial studies, plus a Senate report have concluded that the annual growth in government health spending is not sustainable. At the same time government spending on prescription drugs - both patented and non-patented - is increasing faster than any other part of health spending. And new or patented medicines can be very expensive compared to older drugs and other health treatments. Some therefore blame patented medicines for unsustainable health care costs in Canada.

But a Fraser Institute study suggests that neither patented drugs in particular, nor pharmaceuticals in general can be blamed for the failure of government health insurance to remain financially sustainable.

The study found that patented prescription drugs account for too small a percentage of government spending on health care to be the primary cause of 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.

The research also showed that price inflation for patented drugs is not to blame for Medicare’s financial problems. Government data shows that after adjusting for inflation, prices for existing patented medicines have declined in real terms in 16 of the last 18 years.

Further, the research showed that 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 US prices for identical drugs.

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 parts of government health spending would be growing at sustainable rates. However, the study showed that between 2001 and 2005 spending on non-pharmaceutical components of health care continually grew faster than our ability to pay.

Over the five years, annual spending on health professionals grew by 6.5 per cent on average; spending on hospitals and institutions grew by seven per cent per year; and spending on government health, administration, research and other areas together grew by 7.8 per cent annually. These annual rates are between 1.3 and 1.6 times faster than economic growth of five per cent and between 1.4 and 1.7 times faster than the consolidated growth in provincial revenues from all sources of 4.5 per cent.

And these non-pharmaceutical components of health spending collectively accounted for between 90.4 and 91.8 per cent of total government spending on health during the period studied.

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 non-pharmaceutical medical goods and services make up over 90 per cent of government expenditure on health strongly suggests that efforts to contain health care costs by targeting drugs are seriously misguided.

And if drug spending is causing Medicare to be financially unsustainable, then we should observe increasing rates of growth in overall government health spending over time as the proportion going to drugs increases. But the data showed no link between changes in the overall growth rates of health spending and the increasing proportion going to prescription medicines.

There are two reasons why drugs are attracting a rising share of health expenditures. One is the introduction of new drug treatments that did not previously exist. Another is the increasing use of drugs to replace or complement other forms of medical treatment. The evidence suggests that these are positive developments that lead to improvements in human health and can produce net cost savings when all health spending is accounted for.

In fact, the study showed that hospitalization rates have declined at the same time that drugs have increased as a percentage of government spending on health in Canada. This correlation is broadly consistent with research showing that drugs are a cost-efficient substitute for other treatment alternatives requiring hospitalization.

The evidence suggests that unsustainable growth in government health spending is a function of the flawed design of government health and drug insurance programs, not the price of medical treatment or the introduction of new medical technologies like patented pharmaceuticals. Medicare’s financial problems are not caused by what we buy with our health care dollars, but by how we pay for it.