Healthcare Debates: Does Costly US Healthcare Fund R&D and Medical Research?

Yes, American healthcare is expensive. According to the Centers for Medicare & Medicaid Services (CMS), healthcare cost the United States $3.6 trillion in 2018—comprising 42 percent of global-wide spending on healthcare.

And yes, it does fund medical research. The CMS reported that the American healthcare system spent $174 billion—about 5 percent of total spending—on research and development (R&D). Medical research received $52.6 billion that year—about 1.4 percent of all healthcare spending. The healthcare industry also spent $121.8 billion (3.3 percent of total spending) on development through investment in structures and equipment.

Research!America reported that the total amount spent on medical R&D in 2017 was $182.5 billion. The major sectors responsible for funding medical R&D included industry; the federal government; academic and research institutions; foundations, voluntary health associations, and professional societies; and state and local governments.

The research segments listed below—all within the realm of American healthcare—invested a total of $114.6 billion (63 percent of total spending) on medical R&D:

• Biopharmaceuticals – 51.7 percent of total medical R&D investments
• Medical Technology – 9.6 percent
• Independent Hospital Research Centers – 0.9 percent
• Health Care Services – 0.5 percent

While it is clear that American healthcare does pay for medical research, what is not clear is why this question is so compelling in the American narrative about the cost of healthcare. Responsible for 99 percent of all spending on medical R&D, pharmaceutical companies are the engine that keeps innovation running in the American healthcare ecosystem. Being responsible for 99 percent of all spending on R&D also means that pharmaceutical companies have a deep interest in the messaging around that spending as well.

In a 2019 Atlantic article, Dr. Ezekiel Emanuel notes that some pharma executives have claimed lowering drug prices will lead to decreases in medical R&D as a way to cultivate fear and keep things as they are.

To understand if this question should be of real concern and deserves attention (or if it is just scaremongering), this article will explore research and development in the context of greater healthcare expenditures, including looking into the main drivers of healthcare spending, influences on pricing, and where R&D fits into the whole ecosystem.

According to a 2018 study published in the Journal of the American Medical Association (JAMA), the US in 2016 was the most expensive healthcare system when compared ten other high-income nations. With a mean per capita expenditure of $9,403, the US spent $4,382 more—87 percent more—than the $5,021 average for the other ten countries analyzed.

According to the Organisation for Economic Co-operation and Development (OECD), this differential rose in 2018. The US healthcare system spent $10,586 per capita in 2018, $5,274 more—99 percent more—than the average $5,312 of the same ten countries included in the original study.

Using different methodology, The Commonwealth Fund came to a similar conclusion in 2017, corroborating the JAMA study’s finding that despite paying nearly double for care, the US performed worse than their affluent counterparts in population health outcomes. The Commonwealth Fund report’s finding ranked the US healthcare system as last in access, equity, and healthcare outcomes; tenth out of 11 for administrative efficiency; and sixth out of 11 for care process.

The US healthcare system ranked last overall.

The JAMA study authors asserted that the scapegoats commonly used to explain why the American healthcare system is falling so far behind the rest of the affluent world are not always accurate. Study authors did not find any evidence to support the idea that the US’s situation is extreme when it comes to lack of investment in social services; overutilization due to defensive medicine; the unbalanced ratio of primary care to specialist physicians; and high volumes of care because of fee-for-service systems.

With all these common metrics being non-significant, study authors concluded that price and administrative costs were the primary cause of the scale of healthcare spending in the US in 2016. Major differentials in spending elucidated by the study included:

• Generalist physician salaries: 79 percent higher – At $218,173 generalist physicians in the US earn $96,152 more per year than the average physician salary for the eight other countries with reporting data ($122,021).
• Specialist physician salaries: 96 percent higher – At $316,00, the average specialist physicians in the US earn $154,615 than the average salary for specialist physicians in the nine countries with data ($161,385).
• Pharmaceutical spending: 112 percent higher – The US spent $1,443 per capita on pharmaceuticals, $763 more than the average per-capita spending for the remaining ten countries ($680).

To understand if these expenses are justified, consider some of the major influences on the prices.

According to a 2018 report by the Association of American Medical Colleges (AAMC), 75 percent of doctors graduate with student loan debt. The median cost of attendance to a public medical school in 2019 was $250,222 (and $330,180 for a private school). The median debt for all medical school education following graduation was $196,520.

From a sample figure of $200,000 in federal direct loans, a physician could pay anywhere from $15,600 to $44,400 per year in repayment over the course of seven to 18 years. Interest on their loans would add anywhere from 65 percent ($130,000) to 131 percent ($265,000) of the original loan amount to the total. The average doctor could have to pay back anywhere from $130,000 (due to student loan forgiveness programs) to $440,00.

For an average generalist physician, these rates of repayment could comprise anywhere from 10 to 27 percent of the physician’s take-home pay (i.e., 75 percent of gross pay) each year. If medical school costs and loan amounts remain the same, but US general physician salaries matched the average of the ten affluent nations included in the JAMA study, student loan repayment would be anywhere from 17 to 48 percent of a physician’s take-home pay each year. If medical school debt was eliminated, physician salaries could potentially decrease as well.

Bringing a drug to market is not a cheap process, and the staggering cost of research and development is a commonly cited reason for the staggeringly high prices of pharmaceuticals in the US.

According to a 2017 study of R&D costs for ten cancer drugs published in JAMA Internal Medicine, the median cost of bringing one cancer drug to market was $648 million. The range was $203.6 million to $2.6 billion. While these numbers are quite high, the median revenue made from these drugs in 2017 was $1.66 billion, with a range of $204.1 million to $22.3 billion.

The study authors found that, including opportunity costs, every $1 billion invested in R&D resulted in $7.4 billion in total revenue—more than seven times the investment.

The United States Government Accountability Office calculated profit margins for 67 of the 403 pharmaceutical companies who continuously reported data between 2006 and 2015. The profit margins in 2015 for the top 25 pharmaceutical companies sat at 20.1 percent—nearly 50 percent more than the profit margin of the top 25 software companies that same year (13.5 percent). This profit margin was 300 percent more than the average for the 500 top-revenue companies outside of the pharmaceutical, biotechnology, and software industries (6.7 percent). The remaining 42 pharmaceutical companies experienced an 8.6 percent profit margin—28 percent higher than the top 500 revenue-generating companies in other industries.

In the aforementioned 2019 article in The Atlantic, Dr. Ezekiel Emanuel points to monopoly pricing combined with the US’s lack of pricing regulation as the reason why prices are so high. Without regulation, Dr. Emmanuel says that companies will edge the price up until profits drop, to find the maximum they can charge for the drug.

According to a 2019 article published in JAMA, medical marketing budgets for the pharmaceutical industry increased 67 percent between 1997 and 2016. Going from $17.7 to $29.9 billion over 20 years represents an average increase of 600 million—a 3.4 percent increase per year.

The Centers for Medicare and Medicaid Services (CMS) reported that in 2018, 33 percent of the $3.6 trillion in healthcare spending in 2018 went to hospital care—a dollar value of $1.2 trillion. An article published in Health Affairs in 2019 found that pricing for inpatient care in hospitals grew by 42 percent between 2007 and 2014. Prices for outpatient services in that time grew by 25 percent. For context, physician prices for the same services increased by 18 percent and 6 percent, respectively. In 2018, 65 percent more healthcare dollars were spent on hospital care than on physician and clinical services ($720 billion). Part of this differential is due to the inflated growth of hospital prices.

Adding to the growth of hospital prices was the popularity of hospital mergers in the early 2010s. An analysis for the New York Times examined the impact of mergers on prices in 25 metropolitan areas with the highest consolidation rates between 2010 and 2013. Researchers at UC Berkeley found that prices in these areas rose from 11 to 54 percent in the subsequent years. In 2018, the National Council on Compensation Insurance (NCCI) reported that hospital mergers lead to price increases of 6 to 18 percent.

The place of R&D in the healthcare ecosystem is to enable innovation. Some R&D dollars lead to new and improved methods for treating known health issues, novel treatments for novel diseases, and the technologies and infrastructure that make many treatments possible. The seeds planted by medical R&D led to 48 novel drug approvals in 2019, including acute treatments for migraines, cystic fibrosis, postpartum depression, narcolepsy, and more. In 2016, the US was responsible for 57 percent of new chemical entities worldwide. From this perspective, ensuring increased investment in R&D seems logical.

However, this assumes that investment in R&D grows revenues and decreases costs through gains in efficiency. The Institute of New Economic Thinking suggests that advances in medical technology do not always lead to increased efficacy—and that in many sectors of healthcare, we are experiencing diminishing returns in quality.

For example, most new pharmaceuticals approved are within existing marketplaces and novel treatments in existing markets don’t always improve patient outcomes. In addition, according to Forbes, investment in R&D is not related to growth in sales or profits, shareholder returns, or increases in market capitalization in the greater market. Spending on R&D is a tool of innovation, but the innovation process is more important than overall investment.

Medical R&D is one of the lowest costs in healthcare and is currently contributing to higher profit margins for pharmaceuticals than most other revenue-giants. With the majority of overspending happening elsewhere in healthcare, any necessary cuts would be, logically, applied where overspending is the most egregious.

For example, in The Atlantic, former pharmaceutical CEOs admit that dropping the price of drugs wouldn’t impact R&D because prices are determined by factors like value in prevention and treatment, and anticipated income stream. Pharmaceutical companies could choose to drop drug prices and keep R&D investment stable by making cuts to salaries, profits, or (especially) marketing.

While there is no direct evidence available to explain why this question is such a large part of the conversation on healthcare costs, it is plausible that Dr. Ezekiel may be onto something: by claiming that making healthcare more affordable and accessible will result in denial of medical advances and technology, those profiting from our expensive system may be leveraging fear in order to maintain a status quo that benefits them, above all others.