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The Cost-Saving Potential of Preventive Care

Health Economics Assignment: Impacts of Rising Pharmaceutical Drugs and Spending

The ARM Industry in the USA

Executive Summary

The US pharmaceutical sector is a major mainstay in the country’s economy. Available statistics indicate the industry is growing at a rapid rate show no signs of slowing down. Today, the industry has exceeded $440 billion valuations and enjoys a significant market share in the world’s health market, holding across to 45% of the global pharmaceutical market. According to a projection by Centers of Medicaid Services, spending in this sector (retail prescription drug) will be fast-paced in the next ten years and will consistently outpace other types of health care spending. U.S Department of Health and Human and Services (HHS) is developing and testing many strategies aimed at reducing this huge spending while they maintain and improve health outcomes. Major cost drivers in high pharmaceutical spending include changes in drug mix, increased average cost, and increasing utilization.

Health care spending in the US, especially in the pharmaceutical industry, is an all-time high and continues to increase. In 2016, the US spent over $3,300 billion or 17.9% of GDP on national health expenditures with over $330 billion spent on prescription drugs only. Over the years, the spending growth in prescription drugs has vastly exceeded other health care spending. As such, CMS projects spending in the pharmaceutical sector to outpace another health spending. This as a result of HHS, policymakers, insurers, providers, and organizations to consider different options which they can slow down the spending, which has massively affected health plans, businesses as well as consumers. With significant GDP used in this sector and continuous spending growth trend, it is vital for the government and related stakeholders to develop policies that cut down the spending to save taxpayers a huge burden.

Greater ability to pay is what makes prescription drugs higher in the US more than any other country. Drugs are higher because health insurers in the US can absorb them. A large number of patients are shielded from high drug costs because of directed limits in insurance out-of-pocket expenses. Moreover, a broader portion of R&D processes is incurred by American payer because they have resources to pay. The US has no centralized negotiating authority that can take the responsibility of regulating transactions within the pharmaceutical sector. This means the fed cannot negotiate drug prices for other populations rather than for military veterans and Medicaid beneficiaries.

Since private companies dominate the industry, most of the funding is done by these firms. However, HHS contracts with these companies towards research and development of drugs, countermeasures, and associated diagnostics which are deemed vital to public health and safety. In recent years, HHS has supported research for therapeutics and vaccines in various fields such as Zika, Ebola, and Anthrax. Thus, the government is a major player or source of the fund in this sector. Government involvement in funding the sector is to encourage for research and development of drugs that contribute to achieving better and safe health outcomes for the public even if the costs are high.

Macroeconomic factors tend to influence a wide swath of populations, not just individuals. For instance, when prices of a product increase, they have impacts on the entire industry, that is from consumers, retailers to producers and manufacturers. As such, the interaction between macro-economics factors have impacts on the whole economy. To understand more about the interaction of these factors, we look at an example of rising drug prices on the Account Receivable Industry (ARM) in the US. In this case, we integrate the concept of a closed economy. With this concept, production and consumption activities that determine how scarce resources are spent or allocated and at what prices. That is because the economy only exists to satisfy and meet the needs and expectations of the participants.

The high cost of health care has become one of the most prevalent and pressing issues in the United States. Over 10 million US citizens lack healthcare insurance covers due to the high cost of drugs (Dave and Henry, 2012). Far more, the disposable income of most Americans has stagnated due to inexorably increasing costs of drug prices. In this end, health care spending has become a major driver of the federal debt and budget deficit. As a result, medical debt has become a problem which is starving other public projects of needed resources, thereby raising the burden on lower-middle-income taxpayers. According to Medicaid Services and Centers for Medicare, prescription drugs are the third-largest facet of United States national health expenditures after clinical services and hospital care (Truffer, 2010). QuintilesIMS Institute reports that prescription drugs sales amounted to over $4.5 billion in the year 2017, which reflects 13% of total health spending in the US. Conversely, World Health Organization (WHO) claim that the US citizens spend more on obtaining healthcare per capita more than any other country on the globe, as shown in Fig 1.

 

Figure 1: Globe Health Spending

Source: Brookings

Fig 1 shows the current and estimates for pharmaceutical drugs. The estimates indicate drug prices are set to increase from $4.0 billion in 2017 to $4.1 billion 2018. However, analysts predicate the amounts to fall to $2.8 billion this year and 2020.

Source: Tax Foundation Organization

Higher pharmaceutical prices have received less attention in the US since the pharmaceutical sector is since the industry is meant to generate profit, and most of the insurance and hospital industries are non-profit institutions. However, drug prices continue to grow at an increasing at exceeding economic and inflation growth. In essence, increased drug costs have led to increased debts of consumers, even those who have healthcare insurance coverage. For a patient to recover from an illness, it will cost them time and money (Berndt, 2007). As a result, such an individual will stop working, and expenses will constantly grow. Consumers will be forced to use their disposable incomes or borrow more loans to finance their health needs. Precisely, high drug prices will have positive and negative impacts on the ARM industry.

Skyrocketing healthcare costs have hit millions with crippling debt. Recent Commonwealth Fund shows most adults in the US use most of the savings to pay medical expenses. As a result, most Americans are struggling to pay their debts and bills. Failure to pay debt obligations has negative impacts on the ARM industry. If consumers fail to pay debts, financial institutions will not have the potential to make more loans available. Additionally, most debt collection agencies will face difficulties in recovering these loans. Conversely, when consumers are faced with steep healthcare bills, they turn their attention to easy credit. Similarly, the low-middle-income earners who with healthcare costs exceeding their insurance premiums have turned to credits and loans. Hence, increased borrowing will positively affect the ARM industry since firms can create more loans and earn more interests when loans are recovered. Equally, debt collection agencies will increase their revenues since they will be employed to recover more loans.

Increased drug prices also force the consumer to spend more. In this regard, increased consumer spending will be beneficial for the industry since firms within the ARM industry will have more clients who borrow credit and loans. If consumer repays loans on time, these firms will make supernormal profits. However, due to changes in out-of-pocket responsibilities, most consumers may fail to keep up with pay their medical bills. A survey carried out by the Kaiser Family Foundation and the New York Times shows that patients are faced with a plethora of challenges paying their bills. Many of the survey respondents cite the problem of settling their medical bills as a result of one-time or short-term medical expenses. Failure to pay medical bills has direct impacts on the finances of Medical centers. For instance, if a health institution had acquired debt to purchase medical drugs, they will have difficulties in settling their debts in time. As a result, failure to repay credits on time will negatively impact the credit score and rating of these institutions. In the future, these institutions cannot obtain funds for growth and development or for funding their projects. Conversely, the ARM firms such as credit unions and banks who had offered the loans will report negative cash flows has to result in bad debts yet to be paid by healthcare institutions. Additionally, since the health institutions will not be generating positive revenues, they cannot invest in the ARM industry.

High drug prices not only result in unpaid medical bills but also create a bad credit report for the consumers. In this case, consumers with unpaid debt obligations will have difficulties when seeking credits and loans from financial institutions operating in the ARM industry. Due to the increasing cost of drugs and healthcare, most families face a financial burden to settle other bills. As a consequence, most people are filling with bankruptcy due to huge debts, especially medical debts. For instance, in 2016, about 20% of adults in the USA had difficulties when paying medical bills. As a result, most people were forced to drain their savings and cash their properties and assets to settle medical expenses. In case these individuals had obtained loans from firms operating in the ARM industry, they will likely default. Such firms will be faced with default risk and make huge losses. In some cases, these firms may be forced to cease their operations if they had created more loans than their current asset. In essence, such scenarios negatively affect the growth of the ARM industry.

ARM industry may experience slight growth if the companies producing pharmaceutical and other medical drugs choose to invest in the sector. Since these companies are selling drugs at higher prices, they will make supernormal profits. If these companies decide to channel their funds into the ARM industry, then the firms in the ARM sector can experience positive growth. This is because they can use the invested funds to create more loans and credits for consumers to purchase drugs, thereby generating more interests and profits.

However, regulations bodies and associations have called for a debt collector to meet stringent requirements when collecting debt obligations for medical debt defaulters. Specifically, ACA has urged the non-profit health institutions to choose the steps that ensure they retain Fed non-profit status, which includes the establishment of charity care policies (Regan, 2008). With such policies, patients will not have to pay more for health services, thereby reducing medical debt. Accompanied by guidelines such as Internal Revenue Code 500 (r) which restrict health centers from initiating extraordinary collection actions might be detrimental to patient’s life, a number of medical debts will be significantly reduced. In this case, instead of freezing the assets of the defaulter, debt collecting agency, will have to report the consumer to the bureau. Such guidelines will work to favor consumer’s credit scores, which have impacts on individual financial standing. Hence, problems created by high drug prices will be last straw for Americans.

Methodology

Data will be collected from secondary sources and descriptive methods such as tables and graphs used to analyze it.

Data Analysis and Discussion

Total Health Expenditure of US as % of GDP

Table 1: US Health Expenditure

Year Total Health Expenditure
2007 15.90%
2008 16.30%
2009 17.30%
2010 17.30%
2011 17.30%
2012 17.30%
2013 17.20%
2014 17.30%
2015 17.60%
2016 18%
2017 17.90%

 Figure 2: US Health Expenditure

Source: Kaiser Foundation

Fig 1 shows US health expenditure between 2007 – 2017. The expenditures have increased over the years.

Total Health Expenditure as % of GDP of the US Compared to other Countries (1970 – 2017)

Figure 3: Total Health Expenditures

Source: Kaiser Family Foundation Analysis

Fig 3 shows the overall health expenditure of the US against the country average between 1970 – 2017. It is clear that US health expenditure has increased massively over the years, unlike other countries.

Total Spending on Prescription Drugs

Figure 4: Prescription drugs spending between 2007 – 2017

Fig 3 shows the growth trend of prescription drugs spending between 2007 to 2017. This spending growth rate had increased over time from $240 billion in 2007 to over $300 billion in 2017.

Sources of Funds – Health Insurance & Out-of-Pocket (2007 – 2017)

Figure 5: Source of Funds in Pharmaceutical Drugs

Fig 4 indicates the trend of growth of the source of funds in the prescription drugs between 2007 to 2017. Funds from health insurance have increased over the years while funds from out-of-pockets (directly from patients’ pocket) have slightly increased or remained constant.

Summary and Conclusion

In sum, this short brief has shown how spending in the pharmaceutical has increased over the years. The spending continues to grow and has a huge impact on the budget burden and average Americans. In contrast, the source of funds from health insurance continues to increase to cover the spending in the sector. In most cases, the use of prescription can result in better and safer health outcomes and also lower healthcare costs. However, increasing drug prices without increased quality of life or reduced health care costs can result in negative effects. For instance, high drug costs may lead to increased budget burdens and making drug cost unpredictable.

Works Cited

“Health Spending and the Economy.” Peterson-Kaiser Health System, Tracker, www.healthsystemtracker.org/indicator/spending/health-expenditure-gdp/.

“Health Spending Explorer.” The Henry J. Kaiser Family Foundation, 12 Dec. 2018, www.kff.org/interactive/health-spending-explorer/.

Berndt, Ernst R., et al. (2007). “Authorized generic drugs, price competition, and consumers’ welfare.” Health Affairs 26.3: 790-799.

Dave, Dhaval, and Henry Saffer. (2012). “Impact of Direct‐to‐Consumer Advertising on Pharmaceutical Prices and Demand.” Southern Economic Journal 79.1: 97-126.

Regan, Tracy L. (2008) “Generic entry, price competition, and market segmentation in the prescription drug market.” International Journal of Industrial Organization 26.4: 930-948.

Truffer, Christopher J., et al. (2010) “Health spending projections through 2019: the recession’s impact continues.” Health Affairs 29.3: 522-52

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