This week President George W. Bush struck a blow against property rights when he decreased the value of drug patents. He did this by shortening the period during which drugmakers may profit from their exclusive ownership, thus accelerating drugs' passage into the cheaper generic stage.

Here the president was bending his own free-market ideals - out of desperation. Healthcare outlays are increasing enormously in the US, both in the public and the private sectors. Even as the president was issuing his decision, management at firms across the country was performing what has become a weary autumnal ritual: informing employees that they must increase their health cost outlays in the coming year. This despite the fact that employers' outlays for health will rise as well.

But, what, exactly, is generating these treacherous increases? A study produced earlier this year by PricewaterhouseCoopers for the American Association of Health Plans provides some interesting answers.

There have been, to be sure, the obvious 'cost drivers': advances in treatment and expanded availability of sometimes new and often expensive prescription drugs. Taken together these accounted for 22 per cent of this past year's premium increase, which helps to explain President Bush's breathless pre-election motivation. Increased demand for healthcare generally due to an ageing population is another predictable factor, and more or less inevitable.

But other cost rises were not unavoidable.

Fifteen per cent of the total increase was caused by 'government mandates and regulation'. The category includes benefits in certain classes of care that federal or state law requires private insurance providers to deliver. It also takes into account the cost of increased regulations.

How does the mandate cycle work? First comes the new study or innovation. Then comes the extensive front-page coverage and the stories on morning television: a certain drug works for cancer, a certain kind of chiropractic procedure alleviates arthritis. Next thing you know, legislators are rushing to write a law promising that that new treatment will be made available to every insured patient.

As a result, America today boasts some 1,500 different mandates at the state or federal level, of a variety that would be quaint were it not so costly. North Carolina and Maine require insurers to cover 'pastoral counseling' so that unhappy folk can get a dose of religion with their therapy. Florida and Washington State mandate the availability of massage treatment. Utahans, Texans and citizens of Wyoming are entitled to reimbursement for the cost of dietitians' services. Every state, except, for some reason, Rhode Island and Iowa, pays for sessions with psychologists. California requires firms offer acupuncture coverage (what else did you expect from the New Age state?). Some states have at points put pressure on insurers to cover Human Growth Hormone injections for slow growers ($100,000 for a ten-year course). This even in the case when there is nothing medically wrong with the child, and the parents just want him or her to end up taller.

In other words, while all these mandates make emotional sense, they do not necessarily make economic or even medical sense. Years ago, for example, a few states began mandating the availability of autologous bone marrow transplants as treatment for late-stage breast cancer. The price of this treatment, in combination with chemotherapy, was $100,000. But no matter; the treatment was said to save lives, and it was ideal material for Lifetime Television.

In 1999, independent studies showed that this ABMT therapy did not improve the outlook for these late-stage breast cancer patients. (It was also enormously painful.) Nonetheless, the states did not remove the requirement for coverage from their books. And today, even patients whose doctors counsel them that ABMT is a waste of time frequently still opt to go through with it: the mere availability of such a pricey treatment suggests that it must be worth undergoing. After all, the common wisdom runs, everyone knows doctors can't tell truth about this; they are under pressure to cut costs.

Then of course there are the treatments that did not survive triage-by-TV: mundane but important things like vision care, teeth cleaning - you name it. And we won't even talk about the people who cannot get coverage because mandates have increased premiums.

Beyond mandates, there is another sort of cost rise, the kind triggered by the American disease, litigation. Taken together with risk management, 'defensive medicine' (treatments provided solely to forestall a lawsuit), and fraud, litigation accounts for 12 per cent of this past year's premium increase. In rural parts of several states (Mississippi, Pennsylvania), obstetricians are disappearing; malpractice premiums have doubled or quadrupled.

All of which tells you one thing about President Bush's prescription drug manoeuvre: it's the first of more to come.

© Copyright 2002 Financial Times