This paper examines the social, political, and economic forces driving pharmaceutical innovation in the United States. It surveys the current state of the industry — including its share of GDP, pricing dynamics, and the FDA's regulatory role — and then analyzes key components of innovation: the aging demographic driving demand, the evolution of social institutions such as Medicare and private insurance, distinctly American cultural attitudes toward medical intervention, competitive economic pressures facing blockbuster drug makers, and international tensions over patent protections and drug pricing. The paper concludes that the industry must pivot toward niche markets and cooperative global frameworks to remain viable.
Healthcare expenditures have become a major segment of all developed economies. In the United States, over 15% of GDP — more than $2 trillion — is spent on healthcare every year (Pear, 2004). This is significantly higher than in other developed countries; in the European Union, the average is 10% of GDP (Economist, 2007). A large share of expenditure and profits in the U.S. healthcare system flows to the pharmaceutical industry, which accounts for approximately $300 billion, or 15%, of total healthcare expenditure in the United States (Economist, 2007).
The key issues facing this nation with respect to the pharmaceutical industry are as follows:
While accounting for 15% of total healthcare expenditures, over 50% of profits go to pharmaceutical companies. The cost — estimated at $800 million — and the time required, averaging 13 years from inception to regulatory approval by the FDA, impose a significant barrier to faster and better drug introduction.
The rising need driven by an aging population collides with increased costs that have not been adequately addressed on an outpatient basis by Medicare (for patients over 64) or by private or public insurance for those under 65. The U.S. accounts for half of global pharmaceutical expenditures despite representing only 5% of the world's population, and drug prices in the U.S. are higher than in any other country. A central policy question remains: should Americans continue to bear the costs of drug development for the rest of the world?
Pharmaceutical companies today are also facing a dearth of new products to replace current revenue streams, challenges to existing patent arrangements, and a diminishing number of multi-billion-dollar markets for new drugs. The future will require more targeted approaches, greater disease-specific focus, and shorter, less expensive development cycles.
The age group over 65 is the fastest-growing segment of the U.S. population (U.S. Census Bureau, 2001). The United States has more people over 65 than any other country except China. This large and aging population is significant to medical care because older people consume far more healthcare than younger people. From age 50 to age 60, for example, the average healthcare expenditure per person increases by a factor of seven (Reinhardt, 2000).
The strong correlation between age and healthcare expenditure is well documented across the 30 OECD countries, and the OECD's health data consistently shows that per-capita spending rises steeply with age, particularly after 65. This demographic reality is a primary engine of pharmaceutical demand in the United States.
Healthcare was provided primarily through private means until the 1960s. The Great Society programs ushered in Medicare and Medicaid, which began by supporting the medical expenses of seniors (age 65 and older) and those in the bottom 20% of the income distribution in the United States.
Private healthcare insurance began during the 1940s, in the context of World War II. At that time, wartime wage controls made it impossible for companies to offer higher salaries, so they offered healthcare insurance as an inducement to attract workers. After the war, it became common for most Americans to receive healthcare coverage through their employer. With nearly full employment and long careers at single companies, healthcare was generally a non-issue for most working or retired Americans.
This arrangement began to break down in the 1980s, as soaring healthcare expenditures gave companies strong incentives to reduce benefits, and workers began changing employers more frequently. If a worker's health status changed during a period of transition, it could become difficult or impossible to retain health coverage.
The FDA was created in 1966, in part as a response to the Thalidomide birth defects scandal. Its charter was to ensure that drugs were both "safe" and "efficacious." Although its initial mandate was relatively modest, the FDA has since become a formidable barrier to the entry of new drugs and medical devices.
Although many individuals with untreated illnesses are willing to accept the risks of an experimental drug, the FDA's mandate to formally "prove" safety results in significant delays from inception to market introduction. The central societal debate is whether to allow faster drug access at the cost of lower certainty about safety, or to enforce rigorous safety standards while patients with untreated conditions wait — and sometimes die. In practice, the U.S. response has been inconsistent: a fast track for politically viable drugs and a slow process for the rest.
The U.S. uses more drugs, performs more procedures, and makes greater efforts to prolong life than any other developed country. The U.S. performs four times the number of hysterectomies as other developed countries, four times the number of cardiac interventions (surgeries and angioplasty), and eight times the number of breast removals or lumpectomies for cancer as compared to Europe.
The first instinct in the U.S. is to "do something, anything." This stands in sharp contrast to the United Kingdom, which spends only half as much per capita on healthcare as the U.S. (Economist, 2007). In the UK, the default response is often watchful waiting, while in the U.S. it is active intervention. The result is systematic overprescription of pharmaceuticals.
A second cultural phenomenon is that 60% of all lifetime health expenditures in the U.S. are incurred in the last year of a person's life. This is because American patients and their families are, to a far greater degree than those in other developed countries, willing to pursue aggressive, costly measures to prolong life — even by days or weeks (Hoover, 2002). Although only about 5% of Medicare patients die in any given year, those patients account for approximately 30% of all Medicare expenses.
"American interventionist culture fuels overprescription"
"Blockbuster drug model faces competitive decline"
"Patent disputes and global price disparities"
Herper, M. (2007, October 29). Drug drought. Forbes, n.p.
Hoover, D. R. (2002). Medical expenditures during the last year of life: Findings from the 1992–1996 Medicare Current Beneficiary Survey. Health Services Research, n.p.
Pear, R. (2004, January 9). Health spending rises to 15% of economy, a record level. New York Times, n.p.
Reinhardt, U. E. (2000). Medicare: Its financing and future. Health Affairs, n.p.
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