Contolling the cost of medical care in the US is the touchstone to repairing the broken US medical system. By broken, I mean the delivery of care is inefficent and too expensive. This post will discuss some of the cost issues facing the US healthcare system. Make no mistake, I believe the healthcare in the US is the best in the world. However, outcomes are equally favorable in Europe and yet the per capita heathcare bill is significantly less than the US.  Healthcare in the US is big business. Roughly 16% of the US GDP is spent on delivering healthcare. By the year 2015, that figure is expected to reach 20% of US GDP. Controlling the cost is an imperative.

     Recently I attended a party with a number of doctors of Indian descent who practice in the US. One doctor in particular cornered me to tell me of his experiences in returning to India to practice medicine. He told me that the cost of dissolving kidney stones in India is 75% less than the cost in the US. The procedure which costs $40,000 in the US costs $10,000 in India. The equipment is manufactured in Germany  and used in the US and India. He stated to me that the doctor’s fees for the procedure are unreasonable compared with India. He then smiled and said “But I am not complaining. It goes in my pocket.” It is true that US laws and patient malpractice suits increase the cost of medical services as compared to India. The real reason for the higher cost in the US verses any other industrialized country is that medical costs are not controlled in the US where such costs are controlled everywhere else.

     If we assume a free market in the US, then the laws of supply and demand apply. However, even Adam Smith would recognize that medical costs must go up if demand is inelastic. Stated differently, patients have no choice to consume if they are ill. Basic economics teaches us that if prices go too high consumption will decrease thereby reducing the price. This only works in a scenario where demand is elastic, that is, moves downward when prices are high and up when prices are low. Medical services are consumed when needed regardless of the price. Some form of price controls are required to affect the inelastic demand for medical services, and in the case of prescription drugs, a free market exists only in the US.

     Advocates for the free market of prescription drugs point to the US as the leader of a free market policy. I absolutely believe in a free market if there is a level playing field. Let me give you a simple example. Pfizer, a leading drug company develops a drug for a cost of $1billion. The board of Pfizer authorized the development based on the assumption of a 10% return each year for 15 years. In the first year, Pfizer must earn $100 million. Sales in all parts of the world except the US are running at a $30 million rate for the year. Since the US is the only free market for the drug, Pfizer must price it to earn $70 million in the US to reach $100 million for the year. Thus, because of foreign price controls, US prescription drug consumers pay more than double the amount paid by foreign consumers. In short, the US public is subsidizing the cheaper drug costs for the rest of the world. Two possible approaches are apparent: 1) enact a law that US drug costs cannot exceed 110% of the average cost for the rest of the world, or  2) foreign markets will not be supplied unless the price is at least 90% of the average cost in the US market.

     Prescription drug costs in the US will continue to outpace inflation unless the US goverment recognizes that demand for prescription medicines is inelastic and the pricing mechanism is distorted by foreign price controls. The US people can no longer subsidize the rest of the world by turning a blind eye to the fact that a free market for prescription drugs exists only in the US. Legislation to require drug companies to price in the US based upon worldwide pricing is needed to stem the spiraling costs of presciption drugs.