The Misguided War against Medicines 2011

Government spending on all types of prescription drugs (patented and non-patented) is increasing faster than any other component of health spending. And new or patented medicines tend to be more expensive compared to older drugs and other health treatments. This study examines all of the ways in which patented drugs might contribute to health-care costs.

Provincial health spending has grown faster on average than GDP for the last 37 years. Trends show that health spending will consume 50% of total available revenues (including federal transfers) in 6 of 10 provinces by 2017, up from roughly 25% in 1974. Some researchers blame unsustainable growth in government health spending on the cost of prescription drugs, particularly patented medicines. The evidence suggests otherwise. Prescription drugs account for a small percentage (9%) of government health spending; and patented prescription drugs are an even smaller percentage (5.2%). Excluding prescription drugs, all other non-drug categories of health expenditures (hospitals, professionals, etc.) are growing at an unsustainable pace, while accounting for 91% of government spending on health. There is no observable statistical link between the rising share of the health budget spent on drugs and variation in the growth rates in government health spending. Inflation-adjusted, post-market prices for patented drugs in Canada have been declining for 21 years, and introductory prices for patented drugs are at or below international prices.

The real cause of unsustainable growth in health spending is that government socializes too much of the private consumption costs of healthcare. Provinces subsidize 100% of the cost of medical goods and services through a redistributive, tax-funded, single-payer, government-run, insurance monopoly. Coverage is universal for hospital and physician services, but extends to drugs for only one-third of the population. Consumers are disconnected from the costs of the healthcare they personally use. As a result, the system lacks the normal economic incentives that would produce a sustainable balance between the demand for and supply of medical goods and services. Instead, governments constrain costs through central budget rationing, which creates intractable shortages because, while private insurance could cover unmet consumer demands for healthcare, governments effectively prohibit private payment for hospital and physician services.