Better bang for our healthcare bucks

Healthcare consumes a lot of society’s economic resources - more than 11 per cent of our national GDP in 2012


Troy Media

Healthcare consumes a lot of society’s economic resources – more than 11 per cent of our national GDP in 2012 – according to the Canadian Institute for Health Information.

The money is spent on buying the services of health professionals and running hospitals and other institutions. It also funds capital costs, administration, research, public health and other activities – as well as prescription drugs. These “inputs” of the system are merely the means to get the best “output,” which is better health for patients. But getting better output is not simply a matter of buying more inputs, especially when economic resources are scarce.

A wise use of resources demands that we get the biggest healthcare bang for our buck. We need to know which combination of inputs will most efficiently achieve our desired health outcomes. To which inputs should we allocate more or less of our scarce resources? Answering this question requires an economic way of thinking.

Yet public discussions about health spending are obsessively focused on upfront costs alone – especially when it comes to innovative (or patented) medicines and vaccines. There is little consideration for the downstream benefits that innovative medicines deliver. Canadian health policy should reflect a more comprehensive and economic point of view that considers pharmaceutical costs in the context of all other health spending, and accounts for the societal benefits gained from new medicines.

Most Canadians would probably be surprised to learn that not only do innovative (patented) medicines account for a very small percentage of total health spending in Canada, but these costs have grown more slowly than all other health spending combined.

A 2013 study published by the Canadian Health Policy Institute (CHPI) found that total spending on innovative medicines accounted for only 6.2 per cent ($12.8 billion) of the $205.9 billion spent on all healthcare in 2012. The study also showed that from 2007 to 2012, total spending on innovative medicines grew by only 4.1 per cent, while total spending on all other healthcare grew by 30.5 per cent. After adjusting for population changes, spending on innovative medicines has actually been declining in Canada. In 2012, per capita spending on innovative medicines declined -1.8 per cent since 2007, while per capita spending on all other healthcare grew by 23.2 per cent.

Not only are the costs sustainable, but the relatively little spent overall on new medicines also produces a big return on the investment. Research shows that the societal health and economic benefits from the use of innovative medicines far outweigh the upfront costs.

We have known about the economic value associated with innovative new medicines for a long time. For example, a 2002 study by Dr. Frank R. Lichtenberg of Columbia University (published by the National Bureau of Economic Research), confirmed the net benefits (benefits minus costs) from pharmaceutical innovation. Using data on the entire U.S. population from 1996 to 1998, Lichtenberg found that using newer medicines (reducing the average age of drugs used to treat a medical condition from 15 years to 5.5 years) increased prescription drug spending by $18, but reduced other medical spending by $129, yielding a $111 net reduction in total health spending. The use of newer, innovative medicines reduced non-drug expenditures by 7.2 times as much as it increased drug spending.

More recently, the Conference Board of Canada published a study of the health and economic benefits associated with pharmaceutical spending in Ontario from 2007 to 2012. It found that the benefits offset the costs by a 2:1 ratio. These benefits include reduced demand for other healthcare resources (e.g. hospitalization, surgeries, and ER visits) and reduced productivity losses as people recover and return to work. This study also found that improving patient adherence to their prescribed medicines would further increase these benefits.

The debate about drug costs in Canada needs to move beyond simple budgetary accounting. Our health system should be designed to maximize the net benefits of innovation. Getting there starts with a better understanding of the big picture, and by an economic way of thinking aboutcosts.