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Barking Up The Wrong Tree: Affordability, Not Cost Growth, Is The Policy Challenge

A recent spate of commentaries on the continuing health spending moderation raise an important policy question:  If the cost curve is well and truly bent, why are we investing so much of our policy energy on bending it further, when the more pressing problem is the declining percentage of Americans that can afford our health system’s astronomical costs?

Health spending the past two reported years (2009 and 2010) have grown in the high 3 percent range, the lowest growth rates since Dwight Eisenhower’s last year in office (1960), five years before Medicare. Medicare’s actuaries have pointed to the recession as a root cause.  Yet even Medicare spending growth has subsided to about 5 percent in 2010, a development hard to attribute to recession since so few Medicare patients have first-dollar cost exposure. This analyst’s extensive industry contacts suggest no spending rebound in 2011 and 2012, despite an aging population and fee-for-service’s pernicious volume-increasing incentives in full force.

Pharmaceutical spending. The two most explosive cost problems of the 1980’s and 1990’s, pharmaceutical spending and imaging — which together now represent about 20 percent of total health spending — are now seeing low single digit growth, and seem likely to remain quiescent.  In the pharma case, the main contributor is the ruinous outflow of branded drugs from patent protection, and the failure to replace them with new protected drugs.  This outflow continues unabated until 2018.  Branded drug prescriptions are shrinking by 5 percent per year, and the only things preventing pharmaceutical sales from actually declining are brand price increases and growth in generics, which now represent almost 80 percent of prescriptions, according to IMS Health.  While specialty drugs (biologicals) remain a concern, those too begin losing patent protection in earnest in the next few years.

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