#20 - Higher Prices Aren't
to Blame for Increased Drug Spending
In recent years American's
have been spending more on prescription drugs. In 1990, 5.4%
of total US health spending was for prescription drugs while
by 2000 that figure had risen to 9.0%, or almost double. While
still a comparative bargain at less than 10 cents of every health
care dollar, the prescription drug share of health spending has
been increasing steadily since the mid-1980s.1
Because American consumers
pay a greater share out-of-pocket for prescription drugs than
they do for physician or hospital services, they have been acutely
aware of the growing costs of pharmaceuticals. This has lead
to a common misperception that drug company price increases are
the reason for higher drug spending.
However, the data show that
price increases are not the primary culprit. Rather, the increase
in drug spending has largely been driven by the introduction
of new and better drugs.
For example, in 2000 prescription
drug sales grew 14.7 percent, but only 3.9 percentage points
of that growth came from price increases.2
The other 10.8 percentage points were attributable to more drugs
being consumed and the prescribing of newer, more effective,
and more expensive drugs in place of older, less effective and
less expensive drugs. Similarly, in 1999 prescription drug spending
increased 18.8 percent, but again, only 4.2 percentage points
of the growth was due to higher prices. The remaining 14.6 percentage
points were the result of increased volume and a shift to newer
Indeed, since 1994, though
drug sales have increased anywhere from 8% to 19% each year,
price increases have accounted for only about one-fifth of the
increase each year with changes in the volume and mix of drugs
consumed accounting for the other four-fifths.
Not surprisingly, manufacturers
charge more for newer, better drugs and doctors and patients
want to use more of them.
1 Data from U.S. Health Care Financing
Administration, 2001 as reported in Figure 4-6, Pharmaceutical
Industry Profile 2001, Pharmaceutical Research and Manufactures
Association, Washington, DC, 2001.
2 Data from Retail and Provider Perspective,
IMS Health, 2000 as reported in Figure 4-15, Pharmaceutical Industry
Profile 2001, Pharmaceutical Research and Manufacturers Association,
Washington, DC, 2001.