In watching the wheels come off the new Medicare Part D prescription drug benefit, it's hard to see what, or if, the administration was thinking, especially in regards to the lack of bulk purchasing, without reaching for the obvious cynical explanation. But in an effort to identify what an equitable benefit for prescription drugs might look like, I've examined various pricing strategies and what we normally pay for prescription medications. As a surgeon, I myself prescribe very few medications and hadn't really paid attention to what they cost. In researching this, however, I found a few surprising numbers.
First of all, it's important to scope the problem. According to the HHS National Health Expenditure Data database, total prescription drug spending is right at 10% of total health care spending. In 2003, for example, the total was about $174B spent on drugs. Of that total, very roughly half was paid from private health insurance, a quarter from public funds of all sorts, and the remainder was consumer out of pocket spending.
When governments buy drugs, however, they in general can exercise significant marketing clout, and wind up achieving similar results. Aidan Hollis, at the University of Calgary,
has compared the prices paid by
governments in the US and Canada, and gets similar results. Hollis compares top sixteen medicines with no generic equivalent and finds that Canadians pay about what the VA and Defense Department do. This price is called the "Federal Supply Schedule" (FSS) price.
It is probably not realistic to expect a national single payer system in the US to stabilize at the Federal Supply Schedule price. As the old joke goes, "Somebody has to pay retail." When Medicaid pays for drugs, they get a rebate from manufacturers. It's not quite as good a deal as the FSS price but it's decent. In general, the FSS price is about 45% of retail. Medicaid pays 63%, as do large HMOs that bulk purchase. Privately insured customers pay about 80% of retail, and everyone else (me, for example, since I have an HSA) pays 100%.
Given the proportions of spending among private, public, and out of pocket customers, it seems that overall figures of 70% of retail ought to be achievable for large bulk purchases. This should allow the drug companies to maintain their profits at reasonable levels, help fund new investment, and, significantly, get out of the direct-to-consumer marketing business. I suspect there would be major administrative cost savings at drug companies as well because of the simplification in their marketing efforts.
On this basis, I think it's reasonable to expect savings under a single payer national health care plan of about $52B in total prescription drug coverage. Notice, by the way, that single payer savings alone would be more than sufficient to entirely eliminate consumer out of pocket drug spending in this country.
Additionally, there's another $32B spent on durable medical equipment in the US, and if similar savings apply to the bulk purchase of such equipment, then we can add another $10B in savings.