Do Other Countries Piggyback On U.S. Healthcare Spending?

BY Paul Solman  July 23, 2012 at 3:04 PM EST


Photo by John Moore/Getty Images.

Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Here is Monday’s query:

Name: Andrew Mungai

Question: As a Kenyan (with a business degree from the U.S.) looking at the U.S. from the outside, the first thing I notice when comparing U.S. GDP to other countries is health and defense spending. I think that defense costs stem from fact that the U.S. sees itself as the world’s policeman, whereas other countries piggyback. On health, I think that more should be paid by the consumers getting health services so that the rise in health care costs is felt more widely.

Paul Solman: Thanks for writing, Andrew. This is the first email from Kenya that I’ve had the privilege to address.

Making Sense

I would only point out that other countries piggyback — to use your apt word — not only on U.S. defense spending, but on U.S. healthcare spending too. Our drug costs are far higher than in other parts of the world. Why? In part because the U.S. government does not bargain with pharmaceutical companies to the extent that other nations do. Given the sheer heft of government purchases, via Medicare and Medicaid, we have what’s called “monopsony” power. Practically speaking, this means the U.S. government can force drug companies to lower their price. But we do not. By stark contrast, other countries do.


Since we don’t, this means that, practically speaking, we Americans subsidize the development of drugs that other countries can buy more cheaply for their citizens, since in almost all other countries, health care is national and is bought in volume by their governments.

The conservative jurist Richard Posner argued in 2009 that the government should use its monopsony power to muscle Big Pharma into lowering its prices. But he acknowledged that “[t]he drug companies in turn would reduce their output.”

I, meanwhile, have long taken the position, perverse in the eyes of most people I know, that — to put it bluntly — the more drugs, the better. (Legal drugs, I mean.) In other words, I do not want drug companies to decrease their output.

Yes, I admit it: Most new drugs are of the “me-too” variety and add little or nothing to our collective health. Yes, drug advertising often induces us to take medicines that turn out not to be good for us. Yes, drug marketing, especially on TV, is in general a problem, if not a scandal.

But in the aggregate, the way I figure it, health chemicals produce longer, less painful, more productive life. I could be wrong. I often have been. But if one reason America spends so much more on health care is that we subsidize the development of new health chemicals, count me as sympathetic.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions