The cost of innovation in healthcare

Healthcare spending has been growing at an unsustainable rate.

In 2014, we spent $9,523 per person on healthcare which is up from $4,878 per person in 2000 and $2,854 per person in 1990.1 This growth has dramatically outpaced inflation and now accounts for 17.5% of GDP.2

This translates to rising insurance premiums, deductibles, and medical debt which in turn increase financial pressure on families that are already struggling to get by.3 A recent poll by the New York Times and the Kaiser Family Foundation found that one in five people with health insurance has had problems paying their medical bills requiring them to use up their savings, sell assets, and borrow money at high interest rates.4 For those without insurance, half had similar struggles.

A major driver of these increasing costs is technological innovation which accounts for between 30% and 50% of healthcare cost growth.5 As Nicholas Bagley, Amitabh Chandra, and Austin Frakt explain in a discussion paper written for the Brookings Institute, there are few countervailing forces against endlessly rising prices in medical treatments.6

When doctors prescribe an expensive new treatment, insurance companies may initially resist paying for it. However, as patient advocacy groups sue for coverage, insurance companies inevitably relent, cover the treatment, and then pass this cost on to the general population through higher premiums.

Some physicians have recognized their role as the voice of reason against rising healthcare prices. Recently, some oncologists at Memorial Sloan Kettering made the news when they pushed back against Sanofi Pharmaceuticals for charging $11,000 per month for their drug Zaltrap which had similar efficacy to the existing Avastin priced at “only” $5,000 a month.7 Under threat of bad publicity, Sanofi cut the price of Zaltrap in half.

Likewise, it was a group of doctors from the Infectious Diseases Society of America and the HIV Medicine Association who blew the whistle when Martin Shkreli’s Turing Pharmaceuticals raised the price of Daraprim from $13.50 per tablet to $750.8

Yet, these actions have so far been ineffective at beating back the rising tide. System level change is necessary so that as drug companies continue to innovate, they do so in cost-effective ways.

One proposal put forth by Bagley et al. is cost-effectiveness research. This is an analysis which allows us to understand how much we are paying relative to the health improvement achieved, usually in terms of quality-adjusted life years (QALYs). It was this type of evaluation that helped the oncologists at Memorial Sloan Kettering decide that the survival benefit of Zaltrap (median of 42 days) was not worth the cost ($75,000).

Somewhat more contentiously, this information could be used by Medicare to make more rational coverage determinations. This would help push back on price creep as new treatments would have to demonstrate similar or better cost-effectiveness to existing therapies in order to be covered by Medicare. Because most insurers make their coverage determinations based on Medicare’s, this would have far-reaching effects in the marketplace.

The paper goes into more detail about the proposal, so I’ll leave it at that bird’s eye view summary, but as the Democratic Party debates the relative merits of single-payer healthcare, I hope we can keep broad perspective on how we might make our provision of healthcare affordable, accessible, and effective.



  1. KFF. Health Care Costs: A Primer 2012 Report. Accessed January 20, 2016.
  2. CMS. National Health Expenditures 2014 Highlights. Accessed January 20, 2016.
  3. Abelson R. Health Insurance Deductibles Outpacing Wage Increases, Study Finds. New York Times. Published September 22, 2015. Accessed January 20, 2016.
  4. Sanger-Katz M. Even Insured Can Face Crushing Medical Debt, Study Finds. New York Times. Published January 5, 2016. Accessed January 20, 2016.
  5. Frakt A. How technology drives health care spending growth. AcademyHealth Blog. Published October 15, 2012. Accessed January 20, 2016.
  6. Bagley N, Chandra A, Frakt A. Correcting Signals for Innovation in Health Care.; 2015.
  7. Hall SS. The Cost of Living. New York Magazine. Published October 20, 2013. Accessed January 20, 2016.
  8. Diamond D. Greedy Pharma CEO Cancels 5,000% Price Hike — But He Didn’t Fix The Real Problem – Forbes. Forbes. Published September 22, 2015. Accessed January 20, 2016.
  9. Herper M. Solving Pharma’s Shkreli Problem. Forbes. Published January 20, 2016. Accessed January 20, 2016.

Author: Harrison Kalodimos

I'm a family medicine resident at Swedish Medical Center in Seattle.

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