Ten Myths about the Market for Prescription Drugs
Myth No. 2: Drug Costs Are Rising Because of Cost Increases
"Drugs costs are rising primarily because of nonprice factors."
Drug costs are rising primarily because of nonprice factors, including increased volume of prescriptions, record sales of new products and a changing mix of available products.13 Price increases have been relatively modest over the past 10 years. As Figure I shows, according to a survey by the leading prescription drug price and sales database information company, IMS Health:14
- Of a 14.2 percent increase in total drug costs in 1997, only 2.5 percent stemmed from price increases.
- Of a 15.7 percent increase in total drug costs in 1998, only 3.2 percent was caused by price increases.
According to the (less reliable) sampling methodology of the U.S. Bureau of Labor Statistics (BLS):
- Pharmaceutical prices rose 2.1 percent in 1996 and 3.6 percent in 1997, the lowest two-year average since the early 1970s.
- Manufacturers' drug price increases in 1995 were only 1.2 percentage points above the general inflation level of 2.5 percent and were 0.2 points below the index of medical inflation.
In addition, price indexes frequently do not adequately account for improvements in drug quality. For instance, new antidepressants carry an effectively lower price than older, cheaper antidepressants because they are safer, have fewer side effects, work better and can be taken once instead of three times a day. They also can offset more expensive health care services.
"Of a 15.7 percent increase in total drug costs in 1998, only 3.2 percent was caused by price increases."
Further, the reported price increases for drugs have been overstated, creating and sustaining the myth of rising drug prices and the contribution of price increases to total drug spending. A June 1995 study by the General Accounting Office (GAO) states that the government's Producer Price Index (PPI) for prescription drugs "has overstated drug price inflation substantially since at least 1984." According to the GAO study:15
- During the 1980s and 1990s the PPI showed that, on average, prescription drugs rose at triple the rate of inflation.
- However, flawed sampling exaggerated drug inflation by as much as 36 percent.
- In addition, the government's inflation index failed to reflect the savings generated by the increasing use of cheaper generic drugs.
Statistics used by supporters of price controls also ignore the price competition in the pharmaceutical industry that extends to both new and existing drugs. According to an April 1993 study by the Boston Consulting Group:16
- New drugs approved and launched in 1991 and 1992 were, on average, 14 percent cheaper than the bestsellers already on the market in their therapeutic classes.
- In some therapeutic areas, competition lowered prices even more. For example, four new ACE-inhibitors (types of cardiovascular drugs) launched in 1991 and 1992 had average introductory prices 36 percent below the leader in their therapeutic class.