The Mortgage and Rent analogy represents two different ways that healthcare spending can be visualized.
The Mortgage Model
Imagine that you want to buy a home. You save up a down payment and approach a realtor, who offers you a 15-year mortgage with a monthly payment of $2500. You know you can rent a similar place in the area for $2000/month. So if you’d pay more for a mortgage than you would in rent, why would you buy? Well, because a mortgage is finite. You might pay a higher price in the short term, but you won’t be paying forever. And when those 15 years are up, you’ll own the house outright and never have to make a mortgage payment again. (Meanwhile, your rent over the same period is likely to increase every year!) Making a decision to rent or buy a house based only on the price you’ll pay today is shortsighted. Deciding to rent forever because it’s cheaper now will cost you much more in the long run than accepting a term-limited mortgage.
Similarly, when we think about how society pays for a drug, it’s helpful to use the mortgage model. This involves higher upfront cost when the drug is branded to generate a return for those who “built” the drug, akin to how a mortgage pays off the builders who built your new home. But after a defined period (the length of the mortgage, which is analogous to a drug’s patent life), the company’s patent expires and generic competition is allowed to enter the market, bringing down the cost of the drug, which is akin to paying off the mortgage. When you pay off a mortgage, you only have to keep paying for the maintenance of your home and utilities, which is much lower than the cost of building the home in the first place. Likewise, when you have paid off the mortgage on a drug and it has gone generic, you only have to pay enough to keep the generic drug in production, which costs far less than the R&D costs that went into inventing the drug in the first place.
As it turns out, drugs are the only aspect of our healthcare system that operate on a mortgage model…
The Rent Model
Practically every other aspect of our healthcare system operates on a rent model, in which the price of a service continually increase with the costs of land and labor. Things like surgery and doctors’ visits can never go generic; their costs will always continue to rise. The price of health services tends to increase with inflation, just like any other professional service. Even though most basic plumbing patents expired long ago, the price of hiring a plumber today can still be exorbitant.