Catastrophic Care

A recent Economist article on dialysis perfectly illustrates the inflationary impact of cost-plus pricing. Since U.S. clinics are paid on a cost-plus basis, they prefer to use expensive drugs rather than cheaper ones. In fact, many appear to order drugs in units that exceed what a standard dosage requires because they can charge the government for the wastage. Quoting a stock research firm, the article noted that many clinics preferred an injected drug with a price of $4,100 a year over the identical drug in oral form, priced at only $450 a year. Not surprisingly, the manufacturer of the oral drug responded by increasing its price above that of the injected version to make it more competitive!