A Look at the Cost Explosion in the Healthcare System

Christian Hagist - 30. May 2023

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The cost of medical treatment and medicine itself is rising in Germany and has been doing so in other industrious nations for years. And the reasons behind this trend vary: Medical progress has allowed for more complex treatments; people are living longer; and they require new and more expensive medicine. These factors all drive costs up. Yet, the amounts spent differ wildly depending on the patient or the risk group to which they may belong.   

Individual expenses vary strongly from patient to patient

The 2022 figures from the public health insurance sector in Germany show that the various catalysts behind the cost increase are having differing levels of impact. For example, pharmaceutical spend per capita increased 5.5% (the largest overall jump in costs); spend on inpatient treatment rose 3.2%, dental care 2.9%, and outpatient treatment 1.9%.

Figures from health insurance agencies also show that individual costs strongly vary from patient to patient. Insured persons who incur the highest overall costs account for 20% of all funds spent. Half of that 20% goes toward just 10% of that particular subset of people. If we focus only on funds spent on medicine alone, that gap widens even further. And yet, to date, there has only been a small number of studies that focus on how spending in this area could develop in the medium- to long-term.

What’s driving pharmaceutical expenditure?

It is of interest to both policymakers and society as a whole to understand how medicine consumption develops within varying patient groups. Focusing exclusively on a patient’s sex or age here would only paint a fraction of the total picture. One relatively small group, high-risk patients, is particularly relevant and reflective of where increased costs are strongly concentrated.

Even a basic model scenario, one which assumes steady growth in pharmaceuticalexpenditure in coming years, predicts a 40% increase in costs between 2019 and 2060. Other scenarios have an even bleaker outlook. If the model considers previous expenditure development for high-risk patients, that aforementioned 40% increase would be reached as soon as 2040 and spend could double by 2060. In a scenario in which humans aging comes at a high cost (i.e., the life span of high-risk patients steadily increases), expenditure per capita could rise up to 150% by 2060.

Regardless of which projection is correct, one thing is for sure: pharmaceuticalexpenditure will continue to rise dramatically in the coming decades. Many demographic factors have only a negligible impact here; an increase in spend is primarily contingent on how medicine costs develop, how those developments affect the various risk groups, and whether the life span of high-risk patients improves.

What can politicians do to keep pharmaceutical expenditure under control?

With healthcare-related expenditure in OECD countries (member states of the Organisation for Economic Co-operation and Development) rising yearly at a pace faster than their own GDP, policymakers must understand from which sources these elevated costs stem: increased spend on high-risk groups who require newer, rather costly medicine (as is often the case for those battling cancer). To keep costs in the health sector under control, politicians should take a closer look at today’s permissive standards for approving medicines that target rare diseases, as well as the generous reimbursement plans for the launch of said medicines, to determine whether such a high level of spending is truly having the impact intended. It is advisable to regulate reimbursement schemes within the high-price segment at the European (EU) level, thus rendering any newly approved drugs more affordable. The degree to which a drug helps a patient’s quality of life and life expectancy is an essential factor when assessing new medicines and setting prices—a factor that should be reviewed more critically.

Literature reference and methodology

Through the use of Markov models, this study sees the evaluation of various medium- and long-term projections for drug expenditure in Germany until 2060. The study looks at the cost risk for varying patient groups and considers disparate scenarios that account for developments in life expectancy and the correlated pharmaceuticalexpenditure. The Markov model’s calculations are based on data from four million individuals with public insurance in Germany.

• Hofbauer‑Milan, V./Fetzer, S./Hagist, C. (2023): How to Predict Drug Expenditure: A Markov Model Approach with Risk Classes, in: PharmacoEconomics (2023). https://doi.org/10.1007/s40273-023-01240-3