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Business of Pathways

Health Care as a Preexisting Financial Condition: Individual Costs and Societal Benefits

Authored by

Sean McElligott, MS1; Ira Klein, MD, MBA, FACP2—Column Editor


1Market Access, Scientific and External Strategy, Janssen Pharmaceuticals, Titusville, NJ.

2Healthcare Quality Strategy, Strategic Customer Group, Janssen Pharmaceuticals, Titusville, NJ


Dr Klein owns stock in Johnson & Johnson and Aetna, Inc and is an employee of Janssen Pharmaceuticals. Mr McElligott owns stock in Johnson & Johnson and is an employee of Janssen Pharmaceuticals.


J Clin Pathways. 2019;5(10):33-35. doi:10.25270/jcp.2019.12.00110

While societally we are still debating the best way to finance health care, we do all agree that when a  therapy is available to alleviate illness and suffering, we should find a way to make it available to patients. The current debate is focused mostly on cost outlays today and somewhat about benefits now and into the future. We assert that, because health care is inescapably a preexisting financial condition for all, we should use societal values to drive the decision-making on how we value and pay for health care now and in the future. 

Seventy years ago, President Harry S Truman proposed legislation for a “Fair Deal” for all Americans, a call for some form of universal health care that was a centerpiece issue of his 1948 election campaign.1 Today, we are back to the future in our current presidential primary debates. While health care consumes a much larger portion of the gross domestic product (GDP) today than it did 70 years ago, we have garnered the benefits of significant advances in medicine. This is particularly true in the benefits accrued from drug therapies in a range of disease areas. While societally we are still debating the best way to finance health care, we do all agree that when a therapy is available to alleviate illness and suffering, we should find a way to make it available to patients. The current debate is focused mostly on cost outlays today and somewhat about benefits now and into the future. We assert that, because health care is inescapably a preexisting financial condition for all, we should use societal values to drive the decision-making on how we value and pay for health care now and in the future. 

Financial and Systemic Climate in Health Care

The rising cost of health care, including pharmaceuticals, dominate the current political and public discourse. Health care spending was 17.8% of GDP in 2018, consuming2 almost 20% of all social resources, and pharmaceuticals accounted for 10% of health care spending in 2017.2 Rates of increases in health and pharmaceutical spending has consistently outpaced yearly GDP growth, growing 4.9% and 5.9% from 2000 to 2017 respectively, while GDP grew 2.0% over the same period. The rate of increase for health care has averaged 4.9% annually with pharmaceutical spending growing 5.9% from 2000 to 2017, while GDP grew 2.0% over that same period.3 The high absolute level of spending and the rapid increases in costs have raised concerns about the long-term sustainability of these outlays.

This issue is compounded by the fragmented US health care system, one that distributes payments across different stakeholders in a nonuniform manner. A study of the US National Health Accounts shows a continual rise in personal care expenditures dedicated to health services rising 52% from 2000-2017, with pharmaceuticals representing ~40% of the total health care out-of-pocket expenses for consumers.3 It is no wonder patients are acutely aware of rising pharmaceutical prices. Also, most health insurance benefit designs have a small and fixed dollar contribution for hospitalization services, and a co-payment and co-insurance design for drugs, representing further fragmentation. In cancer care, where much of treatment spend is usually on the drug side, this becomes a financial burden due to benefit design. Health insurers also are constrained by limited time frames, having to set annual premiums and budgets for ever-changing groups of people who frequently switch health insurance plans. This in part explains why insurers and consumers may be focused on immediate changes and have relatively short time frames to consider their costs, especially for pharmaceuticals.

However, more recent trends suggest that change is happening. From 2008-2017, health care spending has moderated to 4.3% per year, and pharmaceutical spending grew by an even more modest 0.4% in 2017 with an estimated net price growth of only 0.3% in 2018 for branded pharmaceuticals.2 The cause of slowing growth in overall health care spending has been partially attributed to the increased use of beneficial pharmaceuticals. For example, close to half of the reduction in overall spending for older adults in the United States for cardiovascular and cerebrovascular disease is due to medications.4 


The fragmented nature of the US health care system also means a focus on costs over the short-term based on the individual stakeholder’s incentives. However, this may lead to spending allocation decisions that are not optimal for society. Societal benefits must be considered for all health care interventions, along with societal costs, to make informed decisions around health now and in the future. For instance, a study found that gains to life expectancy in the United States from 1970-2000 contribute “$3.2 trillion per year to national wealth” and that a cure for cancer “would be worth about $50 trillion.”5 The same study also found that—even ignoring health-related changes in quality of life—the aggregate value of increased longevity has exceeded the additional costs of health care. Pharmaceutical innovations represent a significant portion of these gains. 

Estimates of the impact of pharmaceuticals innovation from 1970-1991 “imply that in the absence of pharmaceutical innovation, there would have been no increase and perhaps a small decrease in the mean age at death, and that new drugs have increased life expectancy, and lifetime income by about 0.75%-1.0% per annum”6 and that spending on pharmaceuticals is one of the better health care investments.7,8 International estimates of pharmaceutical consumption show that it has been “surprisingly productive” and that doubling of pharmaceutical expenditures would increase life expectancy by 2% to 4%9 or more.8,10-12 Disease-specific evaluations of the contributions of medicines also bear out these findings across diabetes,13 chronic conditions like rheumatoid arthritis,14 and cardiovascular disease.15,16 These estimates of pharmaceuticals’ impact on mortality improvements largely do not account for increases to patients’ quality of life,17 reductions in caregivers’ burdens,18 or benefits to employers in the form of productivity.19 Discussions solely focused around short-term health care costs, that minimize or fail to account for societal benefits, will surely lead to current spending and investments decisions that will not achieve the overall goal of maximizing health now and in the future.

Proposal to Balance the Health Care Dilemma for Today and Tomorrow

Given that all stakeholders in the health care system face a preexisting financial condition, but the overall benefits of improved health care and pharmaceutical use are best measured at a societal level, we the authors propose the following to assure sound financial policies now and in the future. 

The value of all health care interventions should be measured at the societal level, for both costs and benefits. Guidelines for the evaluation of benefits and costs should be developed to ensure that the overall level of spending will maximize societal well-being, now and in future. These guidelines should be inclusive of all elements of value, consider all types of health care interventions, and account for all costs.

Once prioritization based on societal costs and benefits have been determined, questions around affordability and investments can be made based on society’s willingness-to-pay. This can also be supported by market-based public policies, such as the Orphan Drug Act,20 that can help incentivize investments toward socially beneficial interventions to alleviate the financial burden on individual actors.

Final decision-making should leverage the decentralized market-based nature of the US health care system. Many of the benefits of health care innovation have been a result of this system. In addition, decisions made at the local levels can more accurately reflect population heterogeneity, individual preferences for health care, and local budget constraints. The decentralization of decision-making reflects the benefits of the current US health care system and leaves room for experimentation and analysis around the best ways to allocate limited resources across different health care systems, populations, and society.

Final Thoughts

Concerns around health care spending have been a perennial problem in search of good solutions. President Truman’s “Fair Deal” to try and manage health care costs through provision of universal health care, some 70 years ago, ultimately failed to gain passage. Health care and pharmaceutical spending represent a large portion of current GDP, and over time have historically increased at rapid rates. Recent trends have shown a slowing in this growth of spending for both health care overall as well as pharmaceuticals. Patients and payers are in the unenviable position of having to make short-term immediate decisions around spending based on their incentive structures. However, broadening the discussions around the costs and benefits of investments in health care to include societal value and costs will ultimately improve decision making. For instance, if we focus on pharmaceuticals as one component of the health care system, they have historically contributed a large share of the societal benefits of improved health while representing only about 10% of the spending. This represents a good investment for society and also a good starting point for discussions around cost and benefit trade-offs that can only be made with a strong understanding around health care’s overall benefits from a societal perspective. 


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