As a percentage of gross domestic product (GDP)—a commonsense measure of a nation’s “ability to pay” for particular items—the United States does not stand out as a heavy spender on prescription drugs. According to Organization for Economic Cooperation and Development (OECD) data, in 1997 the United States spent only about 1.4 percent of GDP on prescription drugs. A number of European nations and Japan spent more. If by 2010 the United States actually spent the roughly 16 percent of GDP on health care now projected by the actuaries at the Centers for Medicare and Medicaid Services (CMS, formerly HCFA), and if prescription drugs then were to account for the roughly 14 percent of total national health spending also projected by these actuaries, total U.S. drug spending in 2010 would still be only about 2.2 percent of GDP.
To be sure, the percentage of GDP devoted to prescription drugs is apt to increase more rapidly after the baby boomers begin to retire in 2011. This is so because the number of prescriptions per American is more than three times as high for the elderly as it is for those under age sixty-five. 9 Even then, however, outlays on prescription drugs are unlikely to represent an intolerable aggregate burden on the U.S. economy. After all, that economy can be expected to grow.
During the roughly two decades from 1980 to 1998 real GDP per capita rose at an average annual compound rate of 1.86 percent. If that rate persists over the next several decades, GDP per capita in 2025 will be 59 percent higher than it was in 2000. Even if, for some reason, that growth rate declines to only 1.5 percent per year in the future, GDP per capita in 2025 still will be 45 percent higher than it was in 2000. Although the CMS actuaries now project that total national health spending will continue to grow faster than the rest of GDP in the foreseeable future, and that the share of GDP devoted to health care will rise continuously, it is a safe bet that in 2025 the GDP per capita that will not be devoted to health care (including prescription drugs) and thus will be available for the other good things in life will still be much larger than it is today.
In short, the central question confronting the United States is not whether the nation as a whole can afford currently projected health spending during the next several decades, but merely whether that spending can be justified in terms of the real benefits it yields.
For most American families, average annual outlays on prescription drugs probably would be a manageable budget item, even if they did not have insurance coverage for drugs. In 1999, for example, average U.S. per capita spending on prescription drugs was $358, compared with $413 for alcohol, tobacco, and entertainment combined. These data provide added perspective on the question of whether our nation can “afford” current and projected levels of drug spending.
Averages, however, can be deceiving in the context of health care, because health spending per capita varies enormously across age groups and is highly skewed even within each age group. In general, a relatively small fraction of households account for the bulk of total national health spending in any given year. That high skew applies to prescription drugs as well. A recent study by Express Scripts indicated that the top 2 percent of the most costly patients whose drug use the firm managed accounted for 33 percent of annual drug spending, and the most expensive 5 percent of patients accounted for about half. Furthermore, patients who were high-cost users of drugs in one year were likely to be so in subsequent years. Among elderly Americans, the top 4 percent of heaviest users accounted for 24 percent of total drug spending for elderly Americans in 1996, while the bottom 40 percent accounted for only 5 percent. Median per capita drug spending for the elderly in 1998 has been estimated to be only $895, although per capita spending for the elderly in the ninety-fifth percentile of the spending distribution was $4,111, and for those in the ninety-ninth percentile, $6,597.
At the household level, drug spending becomes a fiscal problem mainly when lack of adequate insurance coverage intersects with high usage as a result of severe acute or chronic illness. In 1996 some 31 percent of the roughly thirty-seven million Medicare beneficiaries did not have any drug coverage during the entire year, and only 53 percent had coverage for the entire year. Among the 231 million nonelderly Americans, 23 percent did not have any drug coverage, although that is an overall average. For the nonelderly below the federal poverty level, 31 percent had no drug coverage in 1996, and for those between 100 percent and 200 percent of poverty the percentage without drug coverage was as high as 36.5 percent. For many of the uninsured, the desire to control acute or chronic illness with modern drugs does undoubtedly cause serious fiscal hardship.
While it is easy to empathize with uninsured families burdened with heavy out-of-pocket spending for prescription drugs, such families would find at most minor relief from regulatory policies aimed at the supply side of the pharmaceutical market. The proper policy response in this regard would be adequate public subsidies toward prescription drug coverage for these families. In a nation whose current GDP approaches $10 trillion, whose GDP can be expected to grow steadily in the future, and whose population will forever remain among the youngest in the industrialized world, granting every American access to prescription drugs that work would seem to be one of the more trivial economic challenges. At its core, that challenge is not a purely economic one at all; it is a moral challenge in the political economy of sharing abundant resources.
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