No Leverage = Higher Costs

ca-2017-1-11-no-leveragetotal-costsWe hear all the time that medical costs are too high in the U.S., and that Medicare is going to go bankrupt in the future.  The President-Elect recently told us in a press conference that drug companies are “getting away with murder.”  So how high are drug prices, and are those prices contributing at all to the high medical costs in the U.S.?

A Public Citizen research report looked at the prices that older citizens pay for their medications under the Medicare Part D plan, the largest federal drug program, which now covers more than 39 million people.  You might be surca-2017-1-11-no-leverageprised to know that when the plan was passed by Congress under the Bush Administration, Medicare was specifically not allowed to “interfere” with the negotiations between drug manufacturers and pharmacies.  The program was prohibited from leveraging its purchasing power to create economies of scale.  And that would have been plenty of scale; currently, Medicare recipients account for 28% of all medical drug purchases in the U.S. marketplace.

But surely the marketplace itself would have resulted in reasonable drug costs.  Right?  The researchers compared the total expenditure per capita on pharmaceuticals across 33 large nations around the world, and found that not only did the U.S. spend the most—just over $1,000 a year per U.S. consumer, but the U.S. was a huge outlier over the rest of the world.  Canada, whose socialized medical system is widely derided in political debates, came in second, at $750 per capita, and Belgium, Japan, Germany, Ireland, France and Greece are all near or above $600.  At the other end of the scale, countries like Chile ($200), Israel ($300) and Denmark ($300) have managed to control drug costs without sabotaging the quality of their citizens’ health care.

A separate analysis in the same paper found that Americans pay much higher prices for patented drugs than any country in the world—by a nearly 2:1 ratio.  In fact, Medicare Part D pays nearly twice as much for the same medications as the Veterans Health Administration (VHA), due to the VHA’s ability to negotiate prices with its own purchasing power.


About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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