The opportunity cost of pharmaceutical price increases: improving health by investing in education

Abstract

A federal law prohibits the US Government from negotiating pharmaceutical prices. This law comes with an opportunity cost: resources spent on unnecessarily highly priced drugs cannot be spent on other social goals. To calculate the opportunity cost of this spending, this analysis first identified a proxy for unnecessarily high pharmaceutical spending. We then estimated the value of the outcomes which this money would produce if invested in an alternative, high-value use. We estimated the excess price increases in a set of 80 commonly prescribed drugs paid for by the Centers for Medicare and Medicaid Services from 2010 to 2014. The value of price increases among these drugs above the rate of medical inflation was $11.5 billion dollars. This money has alternative uses, including some that promote health and other social goals. This is the opportunity cost of unnecessarily high pharmaceutical spending. Investment in high-school dropout prevention programs was chosen as a measure of alternative uses for this spending because of the importance of education as a social determinant of health and because medical spending has been shown to specifically crowd out education spending. Invested in programs to increase high-school graduation rates, this money could create an additional 200,000 high-school graduates, which in turn would generate an estimated $32 billion in returns (net present value) to government and health improvements of up to 1 million quality-adjusted life years (QALYs) per year of redirected expenditures.

Keywords:

• Opportunity cost
• social determinants of health
• health equity
• drug prices

Notes

1. The case of Sovaldi, a drug that cures Hepatitis C, helps clarify what drives and does not drive increased costs due to price increases. Sovaldi was introduced to the market with a very high price per unit, for which it garnered considerable press coverage. But Sovaldi also has a very high therapeutic value, even relative to price. Moreover, its price was virtually unchanged between 2013 and 2014. Total drug spending increased by the highest dollar amount between 2013 and 2014, in part because of rapidly increasing unit sales of Sovaldi after its introduction in late 2013. Yet the simulated increment due to price increases was not the highest between 2013 and 2014 and had nothing to do with Sovaldi. Although Sovaldi has garnered considerable attention for its high price, the analysis here takes no position on whether the price of Sovaldi when it was introduced may in fact be economically justifiable. Instead, the focus is on price increases after drugs are already introduced.