ECONOMICS:Irish healthcare costs have risen more rapidly than anywhere else in Europe in the face of an inactive Government, writes DAN O'BRIEN
What has driven the seemingly inexorable rise in spending on healthcare in developed countries in general, and in Ireland in particular?
Unsurprisingly, there are many factors at play, including high demand for healthcare services, higher expectations about types and quality of care and, until recently at any rate, ever increasing economic growth and tax revenues to fund better systems.
Many of these issues are covered in an excellent paper* published by two staffers at the Economic and Social Research Institute this week. But the greatest service the paper does is to highlight the relative inaction on containing costs.
Aoife Brick and Anne Nolan write that public current spending on health grew by 124 per cent from the beginning of the decade up to 2009. Although the authors don’t say it, this was the most rapid increase in Europe.
One factor in soaring Irish healthcare expenditure is price inflation in the sector. In all developed countries, economy-wide measures of consumer price inflation are exceeded by the healthcare component. In other words, prices of healthcare products and services are rising consistently more rapidly than most other goods and services.
There are, in turn, multiple factors explaining this. One is the high labour intensity of services provision and the lower productivity gains in the services sector in general. Almost everywhere, this means that services price inflation is consistently higher than goods price inflation.
But the health sector is particular even among services providers. According to CSO data, between January 2000 and last month, economy-wide services prices rose by 56.7 per cent. Over the same period, the healthcare sub-component rose by 77.4 per cent. That is a big difference.
According to Eurostat data, Irish healthcare prices over the decade rose by between two and three times those in selected other EU countries and the US.
Drilling down further, the authors note that among the many components of healthcare spending, “expenditure on pharmaceuticals and payments to community pharmacists have experienced the most significant rates of growth”.
In 2000, the total medicines bill was a nominal €579 million. By last year, that figure had soared to more than €2.1 billion (if the costs associated with the Primary Care Reimbursement Service are included, the figure reaches €2.7 billion).
According to the OECD’s cross-country figures, spending per head on pharmaceuticals in Ireland has grown at twice the bloc’s average rate, at 13 per cent annually, between 2000 and 2008. By the latter year, it stood at $656 per capita (adjusted for purchasing power parity). This was the highest in Europe. Only in North America is spend higher.
One reason for this is the aligning of incentives between those who prescribe drugs and those who sell them. Both parties have an incentive to prescribe more expensive medicines and to charge higher prices for them. Patients with imperfect information and often skewed incentives (the insurer is picking up some or all of the tab) are weak in the face of such incentives.
In Europe, the State plays a powerful role in preventing such collusion for three reasons. First, because it has a much larger role in healthcare provision than in the US, it has an incentive to rein in costs (much more money becomes available to spend on other things).
Second, it has a much greater capacity than fragmented individuals to gather market information. Third, and most importantly, it can do something about it given its power as the dominant purchaser of drugs.
The State in Ireland has broadly the same incentives and information as elsewhere (the ESRI authors cite five separate reports going back to 2003 in which the problem is recognised and proposals for change suggested). The difference in Ireland is the State’s traditional unwillingness to exercise its monopsony power, although there have been signs that a more normal approach is starting to be taken.
In relation to arrangements with the pharmaceutical manufacturers, wholesalers and retailers, previously absurd deals have been tightened up recently.
But neither doctors nor pharmacists have yet been incentivised to shift towards such cheaper medicines. The HSE guideline reads “doctors have been asked for their co-operation in securing whatever economies are possible . . . ”. Such polite persuasion will not bring about change, particularly when drugs companies are curiously generous to medics in many ways, such as paying for research and conference attendance.
Obliging doctors to prescribe nonproprietary names, rather than particular brands, is one way to effect change.
The use of parallel imports is also very limited. This involves procurement of medicines in other markets where they are cheaper.
As Ireland is at the upper end of the price range for most medicines, this is another area where cost savings are to be made.
As is so often the case in Ireland, it is not that interest groups are more powerful or more assertive than those elsewhere in blocking change, it is that Government is less active and assertive in identifying and protecting the wider interest. Discussion of that subject strays into the realm of politics and beyond the scope of this column.
*“The Sustainability of Irish Health Expenditure” http://www.esri.ie/UserFiles/publications/jacb201057/jacb201058.pdf
