httpsdoi.org10.108009581596.2018.1444267COMMENTARY

https://doi.org/10.1080/09581596.2018.1444267
COMMENTARY
The opportunity cost of pharmaceutical price increases:
improving health by investing in education
Jonathan E. Fieldinga, Frederick J. Zimmermana and
Kristin Calsadab
aCenter for Health advancement, Department of Health Policy &
Management, Fielding School of Public Health,
uCla, los angeles, Ca, uSa; bDepartment of Health Policy &
Management, Fielding School of Public Health, uCla,
los angeles, Ca, uSa
ABSTRACT
A federal law prohibits the US Government from negotiating
pharmaceutical
prices. This law comes with an opportunity cost: resources
spent on
unnecessarily highly priced drugs cannot be spent on other
social goals. To
calculate the opportunity cost of this spending, this analysis
first identified
a proxy for unnecessarily high pharmaceutical spending. We
then estimated
the value of the outcomes which this money would produce if
invested in an
alternative, high-value use. We estimated the excess price
increases in a set
of 80 commonly prescribed drugs paid for by the Centers for

Medicare and
Medicaid Services from 2010 to 2014. The value of price
increases among
these drugs above the rate of medical inflation was
$11.5 billion dollars. This
money has alternative uses, including some that promote health
and other
social goals. This is the opportunity cost of unnecessarily high
pharmaceutical
spending. Investment in high-school dropout prevention
programs was
chosen as a measure of alternative uses for this spending
because of the
importance of education as a social determinant of health and
because
medical spending has been shown to specifically crowd out
education
spending. Invested in programs to increase high-school
graduation rates,
this money could create an additional 200,000 high-school
graduates, which
in turn would generate an estimated $32 billion in returns (net
present value)
to government and health improvements of up to 1 million
quality-adjusted
life years (QALYs) per year of redirected expenditures.
Introduction
In 2014, medical care-related expenditures in the United States
accounted for 17.8% of gross domestic
product (GDP), totaling over $3 trillion (Centers for Medicare
& Medicaid Services, 2015b). Yet despite
outspending all other countries on a per capita basis, the United
States ranks in the bottom third of
non-poor countries in life expectancy at birth and 27th out of 34

in life expectancy at age 60, ahead
only of far less wealthy countries like Mexico, Turkey, and
Hungary (Scobie, 2015).
A report from the Institute of Medicine (Young & Olsen, 2010)
documented $425 billion in excessive
costs-per-service delivered in 2009, including $130 billion in
inefficiently delivered services, $190 billion
in excessive administrative costs, and $105 billion in prices that
are too high. Although the report breaks
out inefficiency and administrative costs from prices, it should
be remembered that all of these factors
increase the average cost-per-service without contributing to
medical quality or therapeutic benefit.
ARTICLE HISTORY
received 8 May 2017
accepted 27 January 2018
KEYWORDS
Opportunity cost; social
determinants of health;
health equity; drug prices
© 2018 informa uK limited, trading as taylor & Francis Group
CONTACT Frederick J. Zimmerman [email protected]
CritiCal PubliC HealtH
2019, Vol. 29, No. 3, 353–362
mailto:[email protected]
http://www.tandfonline.com
http://crossmark.crossref.org/dialog/?doi=10.1080/09581596.20
18.1444267&domain=pdf

As a concrete example, one analysis finds that switching to an
equally safe and effective drug from one
often currently prescribed to prevent certain kinds of blindness
could save Medicaid $18 billion over
10 years (Hutton, Newman-Casey, Tavag, Zacks, & Stein,
2014). Continuing to allow the more expensive
drug to be prescribed is an administrative inefficiency that
works as a de facto price increase.
Although an aging population with a higher disease prevalence
and burden contributes to the
increase in health expenditures (Thorpe, 2005), prices per unit
of product or service far exceed general
inflation (The Office of the Actuary in the Centers for Medicare
& Medicaid Services, 2017). No doubt
some of these price increases have accompanied therapeutic
advances, but many have not (Young &
Olsen, 2010).
The rapid rate of increase in prescription drug spending has
outpaced the price growth of all other
medical care products and services. For example, from 2005 to
2014 drug prices increased by 5.4% per
annum above the inflation rate for these products and services,
after accounting for discounts (Aitken,
Berndt, Cutler, Kleinrock, & Maini, 2016).
Economists define the concept of opportunity cost of spending
on a given activity as the value that
spending would produce if dedicated instead to the next most
valuable activity. In the case of medical
spending, the question is to what other use such spending might
be put, and what is the value – to
health and other social goals – of spending on those alternative
uses.

An emerging literature (Fossett & Burke, 2004; Tran,
Zimmerman, & Fielding, 2017) shows how excess
spending from the public purse on medical care displaces public
investments in public health, educa-
tion, and other social services. All of these alternative uses for
public spending have the potential to
substantially improve health outcomes. For example, low -
income housing vouchers (Gubits et al., 2015),
paid family leave (Ruhm, 2000; Tanaka, 2005), universal
preschool (Conti & Heckman, 2013), and clean
energy (Haines, Kovats, Campbell-Lendrum, & Corvalan, 2006)
have the potential to improve health
and provide other desired public benefits.
This study calculates excessive spending due to price increases
on 80 drugs covered by Medicare
as one estimate (among many) of the spending on
pharmaceuticals that has little or no therapeutic
value. It then discusses how that money could provide better
health outcomes if invested in educa-
tional programs that increase high-school graduation rates.
High-school completion interventions were
chosen as an example because strong evidence in the literature
suggests that educational attainment
improves health status and life expectancy (Conti, Heckman, &
Urzua, 2010) and because education
spending specifically has been reduced as public spending on
medical care has increased (Fossett &
Burke, 2004). Using existing cost-effectiveness analyses of
several high-school completion programs,
the potential health and financial benefits of investing in these
programs are calculated.
Increases in Medicare drug prices
Medicare, the second-largest purchaser of prescription drugs in

the US, has made publicly available
information on the price-per-unit of many of the prescription
drugs that it covers. In 2015, the Centers
for Medicare and Medicaid Services (CMS) released a Drug
Spending Dashboard with data on 40 drugs
covered by Medicare Part B and 40 drugs covered by Medicare
Part D between 2010 and 2014 (Centers
for Medicare & Medicaid Services, 2015a). CMS included these
80 drugs in the dashboard because
either (a) they contributed to high total spending (30 drugs), (b)
they were not included under (a) but
had high annual per-user spending (30 drugs), or (c) they were
not included under (a) or (b) but had
high price-per-unit increases (20 drugs). In 2014 these 80 drugs
collectively accounted for 39% of total
drug spending under parts B and D of Medicare. The dashboard
displays spending, utilization, price per
unit, and drug product descriptions. The spending data for Part
D drugs do not reflect manufacturer
rebates. Although the rebate amounts are difficult to determine,
one recent analysis finds that increases
in net prices were 16% slower than increases in invoice prices
(Aitken et al., 2016) (e.g. increases of 4.2%
instead of 5%).
The 20 drugs included because of high price-per-unit increases
accounted for only 3.3% of spending
among included drugs (1.3% of Parts B and D spending). For
that reason, those drugs are not a major
354 J. E. FIELDING ET AL.
driver of the estimates of price increases in the sample of drugs
included. Because of the selection

criteria, this list of drugs is not representative of all drugs paid
for by Medicare. For that reason, the
analysis here is conducted only for this set of drugs, and no
attempt is made to make inferences for
all drugs. Because of the known difficulties in obtaining
information on actual prices paid for drugs,
the data-set represents valuable information on the included
drugs, which accounts for a significant
portion of total spending. As a subset, however, it necessarily
underestimates total spending, including
spending of zero marginal value.
Among the drugs listed in the dashboard, 90% increased in
average price-per-unit between 2010
and 2014, and the average increase across all drugs significantly
exceeded both the average medical
inflation rate (3.2%) and the average annual rate of general
inflation during this period (2%) (Bureau
of Labor Statistics, 2016). Price increases in line with inflation
are natural, but increases above infla-
tion raise suspicion because there is no obvious economic
rationale for them. While medical inflation
exceeds other inflation because the costs of medical personnel
are rising in real terms, it is not clear
why the prices of existing drugs – which are basic manufactured
items – should be increasing at all
above regular inflation.
Of course, real (inflation-adjusted) prices of any good can go up
in response to price shocks to inputs.
Yet because there have been no major changes in the input
prices to pharmaceuticals during this period,
the price increases of existing drugs were unlikely to represent
market responses. Instead, these price
increases likely represent rent-seeking – an economic
phenomenon in which companies use patent

protection, lobbying, and marketing to secure financial returns
above what the free market would
provide. The process of increasing the price of existing drugs
that are on the market has been called
‘market spiral pricing’ (Light & Kantarjian, 2013) and some
researchers assert that it is one example of
rent-seeking by pharmaceutical companies (Kantarjian &
Zwelling, 2013). The price increases of existing
drugs over that five-year period are accordingly one proxy for
what a recent Institute of Medicine report
labeled as ‘prices that are too high’ (Young & Olsen, 2010).
To quantify this economically unnecessary cost to Medicare, we
simulated total spending on drugs
listed in the dashboard each year according to two scenarios: (1)
average price-per-unit increases at
the medical inflation rate and (2) average price-per-unit
increases at the general inflation rate. Each
simulation adjusted for actual changes in utilization throughout
the time period. Then, we calculated
the difference between Medicare’s actual spending and the
simulated spending for each scenario. Table 1
illustrates the differences in drug spending.
The difference in total spending between actual Medicare
spending and simulated projections grew
annually in both scenarios except between 2013 and 2014.1
If drug prices had changed at the rate of general inflation
between 2010 and 2014, spending of
approximately $15.6 billion per year by the 5th year would have
been averted. If drug prices had
increased at the same rate as medical inflation, the excess
spending would still exceed $11.5 billion
annually. These excessive expenditures that provide no direct
health benefits carry an important oppor-

tunity cost.
These estimates are not the only or necessarily the best
estimates of zero-marginal-value spending
on pharmaceuticals, but they are on the low side of other
estimates in the literature. For example, if
Medicare were able to negotiate lower drug prices, researchers
suggest that it could save between
Table 1. actual and simulated annual medicare drug spending
(billions).
2010 2011 2012 2013 2014 Total
actual annual spending $23.97 $28.3 $33.9 $42.2 $55.1 $159.5
Spending if prices increased at medical inflation rate – $27.3
$31.5 $36.9 $52.4 $148.0
incremental difference between actual spending and increase
due to
medical inflation
– $1.0 $2.4 $5.4 $2.7 $11.5
Spending if prices increased with general inflation – $26.8
$30.8 $35.8 $50.4 $143.8
incremental difference between actual spending and increase
due to
general inflation
– $1.5 $3.1 $6.4 $4.6 $15.6
CRITICAL PUBLIC HEALTH 355
$15.2 billion (Shih, Schwartz, & Coukell, 2016) and nearly
$100 billion annually (Baker, 2006). Another

analysis found that US consumers and taxpayers pay a premium
above the prices paid in other devel-
oped countries, and that the value of this premium for the 20
top-selling drugs is $116 billion a year,
compared to only $76 billion a year spent (by the 15 companies
that produce these drugs) on their
global research-and-development budgets (Yu, Helms, & Bach,
2017). Even if one assumes that the US
should shoulder the entire burden of R&D, and that this burden
should come only out of prices on the
top 20 drugs, this implies spending of $40 billion ($116–
$76 billion) that provides no current or future
health benefit. It has elsewhere been suggested that when one
considers all prescription drugs rather
than only the top 20, and takes into account more accurate
estimates of true R&D costs, this $40 billion
is a considerable underestima te (Light, 2017).
The rest of our analysis uses the $11.5 billion estimate. This
estimate is not necessarily the best; it is
used because it is the most conservative credible estimate.
Education as an alternative investment
The billions of excess dollars spent due to pharmaceutical price
increases could provide better health
returns if this money were instead invested in a social
determinant of health, such as education.
Education is chosen because other research has shown that
medical spending crowds out spending
on education, at least at the state level (Fossett & Burke, 2004),
and because education (1) increases
health knowledge and healthy behaviors, (2) enhances
employment opportunities and fosters higher
income, and (3) enhances social and psychosocial factors, such
as social support, executive function, and

perceptions of self-control, that affect health (Brunello, Fort,
Schneeweis, & Winter-Ebmer, 2016; Ross &
Wu, 1995). Although formal educational attainment can be
considered a social determinant of health,
it is provided as a social service through a process that is
defined at the population level (Tanenbaum,
2017). In a sense, society makes a decision about how many of
its people will have various levels of
education. It is in this sense – educational outcomes as a
collective choice about resource allocation –
that education is understood here, not as a manifestation of
individual achievement.
The opportunity cost of excessive spending can accordingly be
estimated by calculating the financial
benefits to government and the health benefits to society from
an investment in educational programs
that increases high-school completion rates.
A meta-analysis conducted by Wilson, Tanner-Smith, Lipsey,
Steinka-Fry, and Morrison (2011) and a
systematic review by the US Community Preventive Services
Task Force identified over 300 programs
designed to increase high-school completion rates (The Guide to
Community Preventive Services,
2013). To identify the relationship between the costs requir ed to
implement interventions and their
potential health and financial benefits, we restricted our
analysis to programs that were implemented in
the United States and reported data on cost of implementation.
Interventions that specifically targeted
General Education Diploma (GED) attainment were not included
because the correlation between
GED attainment and health status is not definitively studied in
the literature. This process of exclusion
resulted in a subset of 17 interventions with an average odds

ratio of 1.81 for high-school graduation.
Among the 17 interventions, there were wide variations in
methods, effectiveness, cost, location,
and population size. For purposes of this economic analysis, we
focused on the cost-effectiveness
(measured by number of additional graduates per $100,000) of
each intervention, conducted from
the government’s perspective. On average, the 17 interventions
produced 1.76 additional high-school
graduates per $100,000 spent, for a cost of $56,300 per
additional graduate.
Of these interventions, three are very briefly described in Table
2. Career Academies are small, with-
in-school learning communities of 150–200 students that focus
on both academic success and technical
education, often with an applied component. In several rigorous
evaluations, they were found to lower
dropout rates for at-risk students (Kemple, 2008; Maxwell &
Rubin, 2000). Talent Search is a program
that increased high-school graduation rates as a means to
increase college matriculation for first-gen-
eration college students of low-income families (Levin et al.,
2012). Small Schools of Choice are public
high-schools located in historically disadvantaged communities
(Bloom & Unterman, 2012). They are
J. E. FIELDING ET AL.356
smaller than typical high-schools, and are organized around
principles of academic rigor, personalized
attention, and job relevance.

Financial returns to government of educational investments
Table 3 illustrates the potential returns in the number of new
graduates resulting from each intervention
based on the amount of money invested. Current estimates of
effectiveness of these three dropout
prevention programs in the US suggest a one-time $11.5 billion
investment could lead to as many as
500,000 additional high-school graduates (Wilson et al., 2011)
(and by extension, an annual investment
of $11.5 billion would lead to as many as 500,000 additional
graduates every year).
The economic benefits of high-school graduation include
increased lifetime income and related
increased tax revenue. Careful economic estimates suggest that
if a large pool of representative high-
school dropouts were instead to graduate from high-school they
would earn an average additional
$289,820 (2004 dollars) over their lifetime compared to
dropouts (Belfield & Levin, 2007a). These increases
in income directly translate into increased tax revenue for
federal, state, and local governments. Over
a lifetime, in discounted present-value terms, this average high-
school graduate will contribute an
additional $101,180 (2004 dollars; $128,893 in 2016 dollars) in
income and sales taxes compared to a
dropout (Belfield & Levin, 2007a, p. 53). Table 4 illustrates the
estimated lifetime benefits of increased
tax revenue expected from a cohort of additional graduates
expected to result from a one-time $11.5
billion investment in each of the interventions. Estimates in this
table and in the rest of the text are
expressed in 2016 dollars, and represent total government costs
and cost savings at the local, state,
and federal levels.

In addition, high-school graduation is associated with decreased
government spending on wel-
fare, crime, Medicare, and Medicaid. Due to lower incomes,
dropouts are more likely to receive public
Table 2. Costs and effectiveness of three high-school
completion interventions (2016 dollars).
Note: Columns (a), (C) and (D) are taken directly from the
literature as cited. Columns (b) and (e) are calculated by the
authors.
Sources:
1belfield and levin (2007b)
2levin et al. (2012)
3bloom and unterman (2012).
Program Description
(A) (B) (C) (D) (E)
Cost per
student
Cost per
additional
grad
Baseline HS
completion
(%)
Percentage
increase in HS

completion (%)
Number of
new grads
per $100,000
average 17 Programs $7210 $56,300 61.4 12.8 1.77
Career acade-
mies1
School w/in school to
promote employ-
ment readiness
$2266 $20,600 21.0 11.0 4.85
talent Search2 academic support
program targeted at
low income students
$3502 $29,900 73.1 11.7 3.34
Small Schools
of Choice3
Small academically
non-selective public
high-school
$6180 $71,860 59.3 8.6 1.39
Table 3. additional high-school graduates from three
interventions.

Note: Calculations based on Column (e) in table 2.
$11.5 billion investment
average 204,161
Career academies 558,252
talent search 384,209
Small schools of Choice 160,032
assistance (e.g. Temporary Assistance for Needy Families
[TANF]; Special Supplemental Nutrition Program
for Women, Infants, and Children [WIC]; housing vouchers).
Lifetime welfare costs for dropouts are, on
average, $9643 more than for graduates (Belfield & Levin,
2007a, p. 60). Because dropouts are more
likely to commit crimes, lifetime criminal justice system costs
for dropouts exceed those of graduates
by $40,701 on average (Belfield & Levin, 2007a, p. 58). Better
health status and better employment
prospects among high-school graduates results in a 50%
decrease in Medicaid enrollment and an
average of $74,969 less lifetime spending on Medicare and
Medicaid compared to a dropout (Belfield &
Levin, 2007a, pp. 54–55). Set against these government cost
savings is additional government spending
on high-school education, estimated at $39,083 (Belfield &
Levin, 2007a, p. 49). (Note that amount is
distinct from the cost of the graduation-promotion intervention
and represents only the resource cost
of the additional education that the intervention is meant to
encourage).
As shown in Table 4, the average government savings net of

education costs for the entire cohort
would amount to approximately $17 billion per year. Combined
with increased tax revenue, the total
net benefit of an investment in the intervention of average
effectiveness would be over $30 billion. All
interventions studies have positive benefit–cost ratios, indeed
extremely favorably so.
Health and well-being benefits of education interventions
In addition to the financial returns to government, the health
benefits of an $11.5 billion investment
in dropout prevention interventions are considerable. A study
that examined health benefits of high-
school graduation found that, compared to a high-school
dropout, a high-school graduate could expect
a mean improvement of 2.2 quality-adjusted life years (QALYs)
by age 65 and 5.1 QALYs by age 85
(Groot & van den Brink, 2004; Muennig & Woolf, 2007). These
improvements come through a variety
of channels, including better capacity to afford needed medicine
and healthy diets, better access to
fitness options, and more options for buffering the effects of ill
health when it occurs. For the national
cohort of students potentially affected by the average
intervention, this would result in a gain of nearly
500,000 QALYs by age 65 and just over 1.0 million QALYs by
age 85.
Implications
Rapidly rising pharmaceutical prices are not the only source of
zero-marginal-value medical care, but
they are one expenditure category under policy control that
could, if redirected, result in substantial
increases in health and quality of life.

In the past, some researchers have suggested that limiting drug
price increases to general inflation
rates from the 1950s to the 1990s would have resulted in a 30%
decrease in research and development
(R&D) spending and 330 to 365 fewer new drugs between 1980
and 2001 (Giaccotto, Santerre, & Vernon,
Table 4. Government fiscal returns from an investment of
$11.5 billion to promote high-school graduation (in millions of
2016
dollars).
Notes: Columns (a) and (b) are calculated as the numbers of
increased graduates reported in table 3 times the estimates
provided in
the text. total benefit in Column (C) is the sum of Columns
(a) + (b). Net benefit in Column (e) is Column (C) − Column
(D). internal
benefit-Cost ratio in Column (F) is (C)/(D).
(A) (B) (C) (D) (E) (F)
Increased tax
revenue
Savings from averted
social service costs
net of education
costs Total benefit
Program
costs Net benefit
Internal

benefit cost
ratio
average $26,315 $17,605 $43,920 $11,500 $32,420 3.82
Career acade-
mies
$71,955 $48,138 $120,093 $11,500 $108,593 10.44
talent search $49,522 $33,130 $82,652 $11,500 $71,152 7.19
Small schools of
choice
$20,627 $13,800 $34,427 $11,500 $22,927 2.99
2005). On the whole, however, empirical evidence on the effect
on R&D expenditures of price reductions
at the margin is not conclusive (Reinhardt, 2001). For example,
one recent study finds a strong effect of
Medicare Part D spending on new development, but also notes
that the effect was limited to certain
classes of drugs (Blume-Kohout & Sood, 2013).
As that study indicates, the real-world processes around drug
research funding are complex, and
involve balancing multiple objectives, even within
pharmaceutical companies. All the same, even sup-
posing that modest price reductions did suppress pharmaceutical
innovation at the margin, economic
theory suggests that the drugs not developed would be those of
the least marginal therapeutic benefit.
Because, as critics have argued, pharmaceutical R&D

expenditures disproportionately go toward me-too
drugs with little or no incremental therapeutic benefit (Light,
2009; Light & Lexchin, 2012; QuintilesIMS,
n.d.), this marginal therapeutic loss would likely be extremely
small. By contrast, the health benefits of
alternative uses of this money are large.
Part of the value of this research is to set a target for expected
returns on investment. Rather than
a simple assertion by the pharmaceutical industry that reducing
its profits would suppress innovation
it should demonstrate that it can provide greater health benefits
than the alternative uses, including
our estimates for the educational intervention we have modeled
in this paper.
Notwithstanding profit margins that average 18% in the
pharmaceutical sector (Anderson, 2014;
Reinhardt, 2001) – or indeed because of those high profits –
changing policy to reign in pharmaceu-
tical prices would be a heavy lift politically, and would
encounter exceptionally stiff opposition from
both pharmaceutical companies and their well-financed
lobbyists. At the same time, there is both
substantial public concern about the high price of many drugs
(Alpern, Stauffer, & Kesselheim, 2014;
Bach, 2015; The Editorial Board, 2015; Pollack, 2016) and a
recognition among many policy-makers
that with monopoly power comes responsibility to further the
public good. A discussion of specific
policy options for pharmaceuticals is outside the scope of this
paper, but policy proposals exist and has
been extensively discussed in the academic literature (Fellows
& Hollis, 2013; Stabile et al., 2013). This
analysis contributes to what should be a well-informed public
discussion of pharmaceutical prices by

highlighting the very real opportunity cost of inaction.
Finally, while it is of course not possible to redistribute funds
directly from CMS to the Department
of Education, that is also not the point. It is inherent in the
nature of opportunity costs that they are
hypothetical. An opportunity cost is simply one way of
expressing the cost of not doing something.
The 108th Congress chose to explicitly prohibit any negotiation
with pharmaceutical manufacturers
over price – an extremely expensive policy choice. Negotiating
pharmaceutical prices would be painful
to their manufacturers. But cutting prices by the amount we
suggest in this example would represent
only a 6.5% price reduction and limited to 80 drugs. This
implies an annual subsidy of $11.5 billion to
the pharmaceutical industry. An alternative use of an $11.5
subsidy would cover 40% of high-school
students for one year with dropout prevention programs that
would allow 200,000 children to graduate
who otherwise would not, and would create nearly 1 million
QALYs. Even if the trade-off between these
alternatives is indirect and abstract, it is meaningful.
At the state level, however, the trade-off is often real and
immediate. Rising pharmaceutical prices
have been identified by the Executive Director of the National
Association of Medicaid Directors as ‘one
of the key factors straining state Medicaid budgets’ (Barlas,
2015). And because states must balance their
annual budgets, when spending on Medicaid increases, spending
on other social services generally
decreases (Tran et al., 2017), with education particularly hard
hit (Fossett & Burke, 2004).
In this analysis, a modest change to prices of drugs could

produce revenue that could yield an
additional 200,000 high-school graduations per year. These
numbers represent only a small fraction of
the 1.2 million American high-school students who drop out of
school annually. Education programs
to increase high-school graduation rates are not a panacea. For
the average program described above,
the number needed to treat is 7.8, and the $11.5 billion per year
would be enough to expose only
1.6 million students per year to the intervention, which is about
40% of the students in public schools
at each year of high-school. Only one in six students at risk
would graduate who otherwise would not
have. However, an increase in high-school graduates even of
this magnitude could generate additional
government savings of tens of billions of dollars, while also
substantially improving health outcomes.
An important part of the value of this analysis is to highlight
that in education (as in many other social
sectors) there are very high expected returns for incremental
increases in public spending. The debate
should not be whether reducing pharmaceutical prices at the
margin reduces potential therapeutic
advances, but whether these hypothetical therapeutic advances
have greater health and economic
returns than other investments, such as providing effective
counseling for high-school completion.
Of course, estimates of future cost savings are subject to
enormous uncertainty as the policy envi-

ronment and underlying risk factors change, and because these
uncertainties are themselves uncertain,
there is no way to calculate reasonable confidence intervals.
There are also geographic variations around
these estimates, which are calculated for the State of California.
Estimates of local and state savings
would be different for different states. Nonetheless, the
magnitude of the effects is important, even if
too high or too low by a moderate amount.
The method used here of identifying zero-marginal-value
pharmaceutical spending is a conservative
one. Other methods have produced estimates as much as 4 times
as high as these (Yu et al., 2017) or
even higher (Light, 2017). Higher estimates of the zero-
marginal-value spending on pharmaceuticals,
would imply that much more money could be freed up for
spending on other policy priorities (Bradley,
Elkins, Herrin, & Elbel, 2011), and would of course imply a
commensurately higher estimate of the total
health opportunity cost of high pharmaceutical spending.
As long as US policy-makers continue to make investments in
low-value activities while neglecting
high-value ones, the US health system will continue to
underperform its peers.
Note
1. The case of Sovaldi, a drug that cures Hepatitis C, helps
clarify what drives and does not drive increased costs
due to price increases. Sovaldi was introduced to the market
with a very high price per unit, for which it garnered
considerable press coverage. But Sovaldi also has a very high
therapeutic value, even relative to price. Moreover,
its price was virtually unchanged between 2013 and 2014. Total

drug spending increased by the highest dollar
amount between 2013 and 2014, in part because of rapidly
increasing unit sales of Sovaldi after its introduction
in late 2013. Yet the simulated increment due to price increases
was not the highest between 2013 and 2014
and had nothing to do with Sovaldi. Although Sovaldi has
garnered considerable attention for its high price, the
analysis here takes no position on whether the price of Sovaldi
when it was introduced may in fact be economically
justifiable. Instead, the focus is on price increases after drugs
are already introduced.
Disclosure statement
No potential conflict of interest was reported by the authors.
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AbstractIntroductionIncreases in Medicare drug pricesEducation
as an alternative investmentFinancial returns to government of
educational investmentsHealth and well-being benefits of
education interventionsImplicationsNoteDisclosure
statementReferences

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