With the newly created "super committee" gearing up to trim government spending, it seems wise to focus on one of the biggest multipliers to our growing debt. Not surprisingly, Medicaid and Medicare together consume 20 percent of 2011 federal spending and are projected to consume $1.38 trillion or 24 percent of federal spending by 2021, according to the Congressional Budget Office.
It's true that rising health care costs are multi-faceted: improved technology, new drugs, rising costs of hospital care, malpractice and over testing, all contribute to growing costs. Yet few politicians focus on how to bring costs down. The new health care law (aka "Obamacare") assumes a 15 member panel will cut $500 billion from Medicare spending, giving Congress little time to override any of the panel's decisions. Surprisingly, this huge power received scant attention during the bill's debate, yet was the major cost saver relied on to provide government health care to an additional 16 million Americans.
But a big reason health care costs are rising faster than inflation is because we have a system which encourages doctors to prescribe the most expensive drugs possible. Recently, the Senate Aging Committee heard incredible testimony on how drug companies can uniquely charge Americans higher prices for drugs with dubious added value. In his testimony, Jonathan Blum, the director of the Center for Medicare, detailed how drug companies can charge whatever they choose because the federal government must pay even when two drugs have similar efficacy and 100 times the cost difference.
The system today also allows drug companies to buy influence with doctors, especially those in academia. The New York Times reported that among eye doctors, drug company Genentech gives annual cash "rebates" of more than $40,000 if, when treating macular degeneration, they use the expensive $2,500 Lucentis prescription medicine rather than the nearly identical $35 alternative of Avastin. The use of Genentech's Lucentis is costing the American taxpayer hundreds of millions of dollars a year.
The truth is, the deck is stacked against controlling costs in the United States. Doctors are incentivized to provide the most expensive drugs possible. It's no wonder that Americans pay higher drug prices than any other developed nation. And it's not only because U.S. drug companies need to recoup expensive research and development costs, as is often alleged.
One might expect that doctors in academia would demand meaningful differences in drug efficacy -- but these doctors are also often heavily dependent on drug company research money. Once doctors in academics are identified as "influencers," they can receive millions of dollars in "research" and consulting funding from the drug companies. One study from Children's Hospital Boston found that most of the doctors at prestigious schools are also paid by drug companies. Go to a medical conference and read the speaker disclosures, which reveal how their research is funded. It is often by the very drug companies whose drug(s) they are touting.
Yet even attempts to improve disclosure of drug company payments are under attack. The Department of Health and Human Services and the National Institutes of Health have proposed that any institution receiving drug company funding disclose that information on a public website. According to NewsMax, Iowa Republican Senator Charles Grassley is concerned with reports that the Office of Management and Budget is trying to eliminate this and related requirements for disclosure.
One simple fix to this mess is to reduce Medicare/Medicaid reimbursements for higher-priced drugs, as well as for less critical or dubious procedures. We especially need to curb drug companies from unlimited feeding at the government trough. Taxpayers have the right to expect that the government at least negotiate and require terms from the drug companies. The price of a drug should relate to its performance and the availability of similar drugs, not to a drug company's vested interest in recouping research and development costs.
Moreover, drug companies can and should pay doctors for research, consulting and teaching, but these payments should be transparent. Drug companies must be barred from paying doctors extra to prescribe their drugs, which is a blatant conflict of interest.
U.S. drug companies often create miracle drugs and they deserve to be rewarded, but we must not let drug companies' financial needs overtake common sense. Our expectation that every patient must have the most expensive treatment and that doctors must have complete discretion to prescribe these drugs, now jeopardizes our nation's economic health. We must save our national corpus before it is too late.
Gary Shapiro is president and CEO of the Consumer Electronics Association (CEA), the U.S. trade association representing more than 2,000 consumer electronics companies, and author of The New York Times best-selling book, "The Comeback: How Innovation Will Restore the American Dream."