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Supply-Side Strategies to Reduce Medical Costs

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Girard Miller
October 13, 2019

Much of the public policy and media attention this year is fixated on health insurance reforms to make healthcare more affordable. My preceding PA Times article last week, The Rubik’s Cube of Health Care Finance, outlined four policy options to expand access to affordable health insurance. However, insurance represents only about half of the $4 trillion United States national expenditure on healthcare. Insurance is ultimately a demand-management financing vehicle. This article flips the market analysis over to the supply side of the healthcare marketplace.

The public finance community typically associates supply-side economics with libertarian or conservative advocates of free-market tax cuts and regulatory rollbacks to expand economic activity. But supply-side economics can also prescribe active governmental intervention to increase the marketplace supply of desired goods and services, in order to pressure prices downward. That is the approach we will explore here.

Expand the supply of medical professionals. For decades, doctors have been in such short supply that the United States has imported medical talent that was trained overseas. Our teaching hospitals, often associated with public universities, strain in their capacity to graduate larger numbers of skilled practitioners. Their facilities and faculty are constrained, often by legislative appropriations. At the same time, the supply of nursing professionals is falling short of demand, and there are ways to train skilled practitioners to perform work that does not inherently require an MD license.

One feasible cure to these supply constraints is to provide federal funding to expand our nation’s medical and nursing colleges by investing in instructional buildings, teaching labs, distance learning, modern virtual/augmented reality training studios and faculty expansion with sufficient compensation to attract more teaching doctors. Without providing free college universally to all Americans regardless of workforce demands, a strategic federal investment in tuition assistance to healthcare professionals will increase the supply of trained personnel and reduce the pressures that doctors face to charge high fees to repay their gargantuan med school debts.

Clearly, Congress will require validating research into the economics of additional federal spending to boost the supply of skilled professionals, and the projected impact on the marketplace equilibrium for their services once the talent pool is significantly expanded. That said, it is difficult to imagine another sector of the economy where a strategic investment in expanded education would be more likely to reduce the pressure of supply-constrained price inflation.

Leverage federal research grants for medical devices and prescription drugs. Each year, the United States Government awards grants for medical research and development, totaling over 20% of America’s  medical R&D expenditures. The National Institutes of Health (NIH) budget alone is nearing $40 billion. Private-sector investors and large corporations pony up much more, with pharma companies alone investing nearly double that amount. For investors, federal research grants are non-dilutive capital, which magnifies their return on investment when a drug or device is successful. For years, Congress and the public finance community have naively deemed the federal research budget a social good which benefits all citizens, while providing risk-free, cost-free upside financial leverage to the investors and companies who later profit from selling their private goods.  

Meanwhile, the public and politicians are outraged by high prescription drug prices, especially when they hear of United States funded and patented products being sold overseas at lower prices. Something is wrong with this picture.

In the private foundation world, many medical research grants now come with strings to require a sliver of equity or a royalty payment if the drug or product becomes commercially successful. NIH and Congress should take note of this strategy. In the context of a $4+ trillion federal budget, even hundreds of royalty payments will not solve America’s massive federal deficit, but they could underwrite additional research funding, or support the expansion of medical training discussed previously.

MFN-pricing ceiling for drugs and devices. A more powerful policy path worth pursuing would be a statutory requirement that NIH and other federally supported research organizations that develop commercially successful drugs must contractually maintain product-lifetime MFN pricing as part of the grant application. MFN stands for Most Favored Nation. It means that the supplier/seller cannot charge a qualifying purchaser a price or fee that exceeds its price for the same product elsewhere. MFN pricing is commonplace in the public pension world, where institutional money managers agree to extend their price discounts to those clients that secured an MFN clause. For American citizens, this would mean that grant-funded drugs selling at low-profit prices in Canada, Europe and elsewhere cannot be priced at a monopoly premium in the United States. The MFN obligation would convey to successors, so that big corporations that later buy up the research-grant recipients must fulfill the contractual obligation. The same rule should apply to medical devices that are supported by federal funds. What is good for the goose is good for the gander.

The MFN concept could be extended even further, more powerfully and more universally, if it were extended by act of Congress to drugs and devices that receive United States patents. In America, we have adopted a short-sighted public-finance concept that patents make the product a private good with no social good qualities. An MFN regime embedded in the United States patent laws would bend the cost curve downward.  After the patent expires, competitive (generic) pricing will drive consumer costs even lower. And for those who might object that MFN pricing would hurt the industry, international experience with investment management fees informs us otherwise: Most often, an MFN price ceiling ultimately becomes the new floor, marginal end-user prices align more equitably with average prices, and profits overall are essentially unchanged.

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This article was adapted from one section of Part III: Health Care Finance in the author’s new book Enlightened Public Finance, which addresses fiscal literacy for the 2020 elections. Other sections address the perils of deficit accumulations, various tax reform options and infrastructure financing strategies. The author’s net proceeds from the following publisher website will be donated to the Government Finance Officers Association’s public finance scholarship program:  https://store.bookbaby.com/book/Enlightened-Public-Finance


Author: Girard Miller received an MPA degree in 1973 from the Maxwell School at Syracuse University, and an MA in Economics from Wayne State University in 1978. Now retired, his 30-year career spanned the governmental, nonprofit and investment communities. Twice the president of national mutual funds, he served on the Governmental Accounting Standards Board, and has authored several publications for the Government Finance Officers Association, where he is an honorary life member.

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