As we discussed last weekend, two Federal Reserve Board economists shot gaping holes the CBO’s health care cost increase assumptions in CBO’s long term fiscal forecasts. As technical as this sounds, these long-term cost increase assumptions are the big driver of the much ballyhooed deficit explosion. And as the Fed economists’ paper discussed in considerable detail, the CBO’s assumptions on the rate of increase look indefensibly aggressive, which in turn means the hysteria about entitlements eating the economy deserves far more scrutiny than it is getting.
Some evidence on the pressures against health care cost trees growing to the sky comes in a new post by Wolf Richter. If you aren’t on the pharma beat, it may be news to you that drug companies are in a funk these days, and it isn’t simply that they haven’t yet found a big new blockbuster category. It it that consumers, even those who have health insurance, are revolting against drug companies either by using fewer drugs (!) or using more generics. Bluntly, consumers are so financially stressed that many are cutting back on prescription drug use. Some of this may be wise (I’ve seen too many doctors hand out drugs like candy, for instance, prescribing antibiotics for winter flus, or prescribing pain meds for dental work, when I’ve found in the few instances I actually needed relief, frequent doses of aspirin or ibuprofen work as well as Vicodin, and are less nasty) but some of it clearly is taking a real health risk. And of course, this is partly due to the aggressive way drug companies have kept putting through price increases; I’ve been amazed at the rises on pretty garden variety stuff that I take from time to time. And on the other end of the spectrum, Sanofi has caved on extortionate pricing on one of its cancer drugs, dropping its +$11,000 a month pricing by 50% after top cancer hospital Sloan Kettering said it would not prescribe it due to its high cost.
Here is the guts of Wolf’s post:
It appears the toughest creature out there, the one that no one has been able to subdue yet, the ever wily and inexplicable American consumer, is having second thoughts about prescription drugs. And is fighting back…
[T]he direst indications came from Express Scripts, the largest pharmacy benefit manager in the US—and perhaps one of the best gauges of spending patterns for prescription drugs.
During the earnings call, CEO George Paz, who ominously was “not prepared to provide 2013 guidance,” embarked on a dark speech. The company’s clients had “unprecedented concerns about our country’s economic outlook,” he said. Unprecedented concerns! So even worse than 2008-2009. He went on:
Our health claim clients are expecting membership reductions in 2013. Large employers have pulled back on hiring plans, using contractors and part-time employees when necessary. Mid to small employers are cutting back or postponing health care coverage decisions while waiting for more clarity on Health Care Reform. And we continue to see low rates of drug utilization as individuals deal with uncertainty at the household level.
He lamented “the current weak business climate and the unemployment outlook” and was worried about the “challenging macroeconomic environment.” …
But beyond the company’s fate, he’d pointed at what ails the US economy, including a shift to part-time workers and contractors often without healthcare benefits, and smaller employers who, in their struggle to survive, are cutting back on healthcare benefits. As these workers—the inexplicable American consumers—are left to their own devices, they have to make their own decisions about what prescription drugs, if any, to blow their scarce money on.
Now I am sure some readers are thinking, “Ah, this is just a one year blip. Obamacare will come in and all these uninsured people will be covered.” Well, that’s not exactly the story. First, the ACA will still leave 30 million uninsured. Second, due to the failure to address health care costs generally and Big Pharma price gouging in particular (remember, basic drug research is heavily funded by the National Institutes of Health and other Federal bodies, with no qui pro quo re pricing in return) insured individuals are rationing their drug use. From Wolf again:
Express Scripts has seen this trend in another area. Its Drug Trend Report, which dissected prescription drugs sold to its members in 2010 and 2011, sketched the beginnings of the paradigm shift: in 2011, specialty drugs sales increased 17.1%, down from a 19.6% increase in 2010; traditional drugs only eked out a gain of 0.1%, the lowest increase since it began tracking the data; and spending on all prescription drugs combined rose only 2.7%, also a record low. That was for 2011.
But the report didn’t include insights into the buying behavior of the 48.6 million uninsured Americans who’re even more reluctant to spend money they don’t have on prescription drugs they can live without. And it didn’t include the trends of 2012, which as Paz phrased it, are cause for “unprecedented concerns.”
So get this: the increase in drug spending in insured patients in 2011 was 2.7%. That’s less than CPI inflation. And the gloom and doom from industry incumbents says the spending level was really bad in 2012, which means it might actually have fallen. No wonder Big Pharma stock prices rose as a result of the ACA. They desperately needed to get their teeth into a pool of new consumers, which will be the newly insured, to keep any sort of growth going if they continue to pan out in bringing major new drugs to market.
The other issue that ACA boosters fail to consider that a lot of insurance still leaves a lot of medical costs with the consumer, and there is every reason to expect the insurance industry to offer low coverage insurance to those who want or need lower premiums. Back to Wolf:
In 2012, plans with deductibles of $1,000 or more made up 19% of employee-sponsored health plans. Families covered by such plans, for better or worse, are cutting back medical spending … by 14%, according to a study last year. They’re making medical decisions where at least one part of the equation is their own money. And they’re accomplishing what no one has been able to accomplish so far, namely taming the untamable healthcare expense monster.
I wouldn’t be quite as chipper about this situation as Wolf is. The medical industrial complex is starting to recognize that they can’t extract blood from a turnip. But they have only just recognized that consumers are hitting the limit of what they are willing and able to pay. The ACA may give them a breather, which they could use to work though this transition. But given the priority they give to profits, as opposed to responsibility to the public, it’s more likely that they’ll continue their current aggressive pricing until the new reality of de facto spending limits is undeniable.