Increased Prescription Drug Usage Driving Spending Increases
Spending in the U.S. on prescription drugs has been increasing rapidly. Expenditures increased by nearly 12 percent from 1987 to 1994 and by 12.9 percent from 1994 to 2000. This increase in expenditures is a matter of great concern for consumers, businesses and policymakers and is at the heart of such proposals as government control over prescription prices and a Medicare drug benefit.
Unfortunately the sources of these increases are widely misunderstood by the general public and politicians. What is increasing most rapidly is drug consumption not drug prices.
Just over half of the drug expenditure growth from 1987-94 was due to an increase in drug prices. The other half was caused by increased drug consumption. From 1994 to 2000, increased drug prices fueled less than a quarter of increased expenditures with over 75 percent of the increase in spending coming from increased consumption.
Recent data reinforces this point. Drug expenditures increased by 14.9 percent in 2000 and 16.9 percent in 2001. Expenditure increases in both of these years were fueled by increased drug consumption, with rising drug prices explaining less than a third of the increase. These figures show that increased drug consumption is the primary driver of rising pharmaceutical spending, not increases in the price of the drugs being consumed.
Why is prescription drug consumption increasing so rapidly? One obvious source of growth is the development of new drugs that consumers demand. Between 1997-2000 expenditures on new drugs accounted for over 40 percent of the growth in spending on medicines.
Many of these new drugs are chosen, despite being more expensive than existing drugs, because they provide better results such as fewer side effects. Ulcer and gastro disorder drugs such as Prilosec and Prevacid are but two examples. Other new drugs are for disorders where no drug therapy had previously existed. Protease inhibitors for AIDS, which have markedly reduced the death sentence that accompanied this disease, fall into this category.
A second driver of increased drug consumption is that some drugs have been found to be useful in the treatment of other medical problems. For example, Wellbutrin is an antidepressant that is now also used to reduce smoking. Additionally, older blood pressure medicines are now used in the treatment of post-heart attack patients.
The availability of new drugs and the increasing uses of existing pharmaceuticals are a big part of the rapid increase in drug consumption and, therefore, drug expenditure increases. The public wants these products because of their real health benefits.
Of course, all types of products produce quality-of-life benefits. Consumers must weigh these benefits against the costs of the product. Despite assertions that medical products and services are somehow different from other products and services in the market place, research clearly shows that as health care costs fall consumers use more of it.
In 1980, around 66 percent of spending on drugs came directly out of a patient’s pocket. Today that number is 30 percent. Many Americans are facing lower effective prices for drugs due to prescription coverage from private plans, Medicaid and Medicare HMO, or Medigap policies. This has had the effect of reducing the effective costs of prescriptions and is a major contributor to the increased demand for drugs.
Rapidly rising drug expenditures are being driven by dramatic increases in the volume of drugs purchased by consumers, not by rising drug costs. Price controls will therefore do little to reduce overall drug expenditures and may actually increase them.
Notes
The information in this article is drawn from: Berndt, E., "Pharmaceuticals in U.S. Health Care: Determinants of Quantity and Price," Journal of Economic Perspectives, Vol. 16, 4, Fall 2002, pp. 45-66.
Michael T. Bond, Ph.D., is Director of the Center for Health Care Policy at The Buckeye Institute and a professor in the Department of Finance at Cleveland State University.
