Paying for Drugs: Long-Term Benefits vs. Short-Term Costs

PwC has published its predictive Top Health Industry Trends for 2016. It is enthusiastic about the uptake of mobile and telehealth technologies, and consumerism in health care. Overall, the report is both interesting and uncontroversial.

However, there is one datum, from a consumer survey, which is hard to figure out. PwC asked consumers about paying for drugs, and found that “more than half of consumers would be willing to pay the cost of a drug over time instead of all at once.” The actual proportion was 53 percent; 17 percent were not willing, and 30 percent were not sure.

The question is hard to understand. We pay for a prescription every time we fill it. If we have a chronic illness that requires taking medicine for a long period, we do not pay for it “all at once.” Nevertheless, there is a “question behind the question” that is lurking here: How would you prefer to pay for one pill that could cure years of illness?

The obvious answer is to pay over a long period of time, while obtaining the benefit now. This is how we should pay for expensive drugs like Sovaldi, which effectively cures a type of Hepatitis C. When it first came out in 2013, it cost $84,000 for a 12 to 24 week course of treatment. However, it eliminated hundreds of thousands of dollars of treatments, including liver transplantation, for patients with previously incurable Hepatitis C.

Most people recognize that the $84,000 is worth the cost. There has been a small flurry of proposals to solve this problem of balancing long-term benefits with short-term costs. However, we are over-thinking the issue. We don’t buy houses or cars or retirement income “all at once.” Financial markets have long since figured out how to finance these benefits with loans or insurance.

The reason it is still a problem in health care is a consequence of government design. Whether financing employer-based benefits, individual Obamacare coverage, Medicare Advantage, or Medicaid managed care, health insurers bear risk for only one year. It is what I have called the heliocentric doctrine of health insurance. As long as government mandates that health insurers take risk only one year at a time, this problem will not be properly resolved.

John R. Graham is a former Senior Fellow at the Independent Institute.
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